A worthwhile read for all PP'ers

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Kevin K.
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A worthwhile read for all PP'ers

Post by Kevin K. » Wed Oct 20, 2021 10:25 am

gizmo_rat posted this in the gold sub-forum but I think it's a worthwhile if not essential read for all PP'ers so thought I'd repost it here:

https://www.pragcap.com/did-bitcoin-kil ... y-utility/

To be clear, this guy is NOT a Bitcoin shill but rather a very knowledgeable finance guy who's a long-time PP fan. To his credit he raises important questions without pretending to know the answers.
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Re: A worthwhile read for all PP'ers

Post by bitcoininthevp » Wed Oct 20, 2021 11:17 am

After all, all crypto is endogenous in the sense that it is literally created from nothing and can be borrowed into existence in exactly the same way that modern banks create synthetic “dollars” from nothing when they make loans. A “fractionally reserved” Bitcoin system with endogenous lending could be every bit as inflationary as the current fiat system

I dont really understand what he means with this part.

You cannot lend/borrow BTC units into existence. That is nonsense. You could, of course, create paper claims to real BTCs. And you could create more paper claims to BTC than there are BTC in existence. This is a risk with any asset. That is why "not your keys, not your coins" is such a prevalent mantra in the Bitcoin community.
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Re: A worthwhile read for all PP'ers

Post by I Shrugged » Wed Oct 20, 2021 11:36 am

bitcoininthevp wrote:
Wed Oct 20, 2021 11:17 am
After all, all crypto is endogenous in the sense that it is literally created from nothing and can be borrowed into existence in exactly the same way that modern banks create synthetic “dollars” from nothing when they make loans. A “fractionally reserved” Bitcoin system with endogenous lending could be every bit as inflationary as the current fiat system

I dont really understand what he means with this part.

You cannot lend/borrow BTC units into existence. That is nonsense. You could, of course, create paper claims to real BTCs. And you could create more paper claims to BTC than there are BTC in existence. This is a risk with any asset. That is why "not your keys, not your coins" is such a prevalent mantra in the Bitcoin community.
Here's how, sorry for the preachy tone but it's too much work to re-write now. :)
(And using the term BTC very generically or broadly.)
Suppose eventually that BTC becomes fairly stable and transactional.
Suppose there are people who are accumulating savings in BTC. Suppose a BTC bank offers them interest in return for their deposits.
Suppose there are people who would like to borrow BTC at interest from the bank.
Suppose it's allowed for the bank to lend more than it has, because after all, very few savers are going to want their BTC back at a given point in time.
Done and done.

All of those ideas seem plausible given the nature of banking and personal finance. If and when BTC becomes ubiquitous, most holders are not going be be savvy. They will go with the flow.
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Re: A worthwhile read for all PP'ers

Post by whatchamacallit » Wed Oct 20, 2021 11:56 am

I think the author's point is that more and more crypto currencies can be created. There is not a monopoly crypto.

That has always been my biggest hang up. The crypto that rises the fastest is the one that is currently trending.

So I think they are more a long the lines of a growth stock than a wealth preserver.
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Re: A worthwhile read for all PP'ers

Post by dualstow » Wed Oct 20, 2021 12:11 pm

In the year 2046, they’ll take us off the Bitcoin Standard.
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Re: A worthwhile read for all PP'ers

Post by Kevin K. » Wed Oct 20, 2021 12:24 pm

bitcoininthevp wrote:
Wed Oct 20, 2021 11:17 am
After all, all crypto is endogenous in the sense that it is literally created from nothing and can be borrowed into existence in exactly the same way that modern banks create synthetic “dollars” from nothing when they make loans. A “fractionally reserved” Bitcoin system with endogenous lending could be every bit as inflationary as the current fiat system

I dont really understand what he means with this part.

You cannot lend/borrow BTC units into existence. That is nonsense. You could, of course, create paper claims to real BTCs. And you could create more paper claims to BTC than there are BTC in existence. This is a risk with any asset. That is why "not your keys, not your coins" is such a prevalent mantra in the Bitcoin community.
Endogenous explained:

"In an economic model, an exogenous variable is one whose value is determined outside the model and is imposed on the model, and an exogenous change is a change in an exogenous variable. In contrast, an endogenous variable is a variable whose value is determined by the model."

Which is a fancy way of saying that Bitcoin and other cryptocurrencies are very much like any other fiat currency except in their case no government behind them or regulating them. He's clear about all of this in his post, but that's not the point of the post. Rather it's his observations about - and questions about, going forward - cryptocurrencies of all sorts siphoning off interest in and to varying degrees replacing the role of gold in portfolios that are of interest, IMHO.
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Re: A worthwhile read for all PP'ers

Post by dualstow » Wed Oct 20, 2021 12:31 pm

Cullen Roche states that gold is difficult to transport and that “bitcoin and crypto fixes that.”

I can certainly see an advantage of bitcoin over dollars if, say, Mexican immigrants or migrant workers want to to send money home to Mexico and if, for whatever reason, they don’t want it to be tracked.

But gold already wasn’t being used for that purpose. Gold is for stashing. It already hasn’t been used for transactions for a very long time.

He wonders aloud about bitcoin vs inflation and notes that gold hasn’t done much as an inflation hedge recently. That’s fine.

What I worry about is if young people just have no interest in gold whatsoever, and no one wants it. If terrible things stop happening to crypto, like Mt Gox things, maybe gold really will be left by the wayside. That’s one reason I can’t do 25% in gold.

But I don’t understand his argument that Bitcoin is better because it’s a more convenient medium of exchange. I used it as that (after B in the vp helped me recover my bitcoin. Thank you again! 🍻), a medium of exchange, to buy gold actually. It was slower than telling the vendor I would mail a paper check, and there were steep fees (not from the vendor) that were something of a surprise.

No idea how all this is going to play out.
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Re: A worthwhile read for all PP'ers

Post by Kevin K. » Wed Oct 20, 2021 12:43 pm

Mr. Roche isn't recommending Bitcoin and doesn't use any alternative assets in his newly-launched Disciplined Fund ETF. Here's a link to the site for it. I find the countercylical approach intriguing. Very much a "next-gen" approach to buy-and-hold and rebalancing:

https://disciplinefunds.com/what-is-the ... line-fund/


Worth poking around on his website and looking at reviews of his book. He may not be Ray Dalio but he's got a pretty impressive background in macroeconomics.

https://www.amazon.com/Pragmatic-Capita ... =ABIS_BOOK
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Re: A worthwhile read for all PP'ers

Post by bitcoininthevp » Wed Oct 20, 2021 1:27 pm

I Shrugged wrote:
Wed Oct 20, 2021 11:36 am
Here's how, sorry for the preachy tone but it's too much work to re-write now. :)
(And using the term BTC very generically or broadly.)
Suppose eventually that BTC becomes fairly stable and transactional.
Suppose there are people who are accumulating savings in BTC. Suppose a BTC bank offers them interest in return for their deposits.
Suppose there are people who would like to borrow BTC at interest from the bank.
Suppose it's allowed for the bank to lend more than it has, because after all, very few savers are going to want their BTC back at a given point in time.
Done and done.

All of those ideas seem plausible given the nature of banking and personal finance. If and when BTC becomes ubiquitous, most holders are not going be be savvy. They will go with the flow.
Ok so the claim is that paper claims on BTC could exceed BTC. This could be true for anything so Im not sure I understand how this is relevant or important specifically for BTC.

Some points about Bitcoin on this "paper bitcoin" matter. Custodians (banks, exchanges, whomever) holding bitcoins can execute a proof of reserves, showing they (at least at that moment) control access to XXXX BTC. This is using some math/crypto-type functions. I would expect even lay folks would be more interested in a bank that publishes their reserves vs one that doesn’t.

That said, I think folks holding their own keys even in a collaborative custody model is better for most people.
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Re: A worthwhile read for all PP'ers

Post by bitcoininthevp » Wed Oct 20, 2021 1:30 pm

Kevin K. wrote:
Wed Oct 20, 2021 12:24 pm
Which is a fancy way of saying that Bitcoin and other cryptocurrencies are very much like any other fiat currency except in their case no government behind them or regulating them.
In what ways is BTC like USD?
Kevin K. wrote:
Wed Oct 20, 2021 12:24 pm
it's his observations about - and questions about, going forward - cryptocurrencies of all sorts siphoning off interest in and to varying degrees replacing the role of gold in portfolios that are of interest, IMHO.
I didn’t really see anything novel here, personally. What did you find most interesting? Folks talking about BTC as digital gold for a decade.
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Re: A worthwhile read for all PP'ers

Post by bitcoininthevp » Wed Oct 20, 2021 1:40 pm

whatchamacallit wrote:
Wed Oct 20, 2021 11:56 am
I think the author's point is that more and more crypto currencies can be created. There is not a monopoly crypto.

That has always been my biggest hang up.
You can spin up more and more cryptocurrencies, sure! But its not about the code. The code can be copied and pasted a million times, so that code isnt the valuable part.

Bitcoin has first mover advantage/lindy effect, the largest current market cap/liquidity, the best developers, the most hashrate securing it/security (mining), the largest ecosystem surrounding it, arguably the most decentralization, a clear purpose which it has delivered on (hard money), the best credible monetary policy.

You could clone bitcoin code EXACTLY and you would have zero of these.
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Re: A worthwhile read for all PP'ers

Post by I Shrugged » Wed Oct 20, 2021 3:41 pm

I love everything about it except the speculative nature/ price movement. Of course I say that with only a vague understanding of how it works.
Anyway, when and if the price ever settles into a range that inspires long term confidence, then I'd be willing to get in. And if that price is 200K, that's fine. I don't need to get rich in Bitcoin. If it's not going away, then I can wait for it to be what I want it to be. And if it's going away, then I will be glad I waited. That's not exactly conventional thinking about it, but it's my take.
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Re: A worthwhile read for all PP'ers

Post by whatchamacallit » Wed Oct 20, 2021 5:21 pm

Serious question. Is there company besides microstrategy and Tesla that is exclusively buying and selling crypto for profit?

Kind of like a REIT.

I might see some value in that.
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Re: A worthwhile read for all PP'ers

Post by dualstow » Wed Oct 20, 2021 5:53 pm

whatchamacallit wrote:
Wed Oct 20, 2021 5:21 pm
Serious question. Is there company besides microstrategy and Tesla that is exclusively buying and selling crypto for profit?
Square is one. More here - https://news.yahoo.com/companies-with-t ... 02396.html
Palantir bought something like US$50MM in gold bars.
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Re: A worthwhile read for all PP'ers

Post by Kevin K. » Wed Oct 20, 2021 6:01 pm

I really didn't intend this to turn into yet another Bitcoin thread. We've had enough of those. The point of the article isn't to suggest Bitcoin as a replacement for gold but rather to suggest that interest in BC and other cryptos has had and will likely continue to have significant effects on the price of gold. The blog post is specifically about the PP:

"My only beefs with the Permanent Portfolio are that this time might truly be different from when Browne created the portfolio in the 1980s mainly because:

0% interest rates mean that 25% of your money in cash/t-bills is way too much for most people.

Gold relies on a monetary “faith put” that exposes 25% of your future returns to the risk that this “faith put” recedes or disappears."

So what's up for discussion here is whether half of the PP's assets need to be modified or replaced in light of current realities.
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Re: A worthwhile read for all PP'ers

Post by dualstow » Thu Oct 21, 2021 7:19 am

Kevin K. wrote:
Wed Oct 20, 2021 6:01 pm

So what's up for discussion here is whether half of the PP's assets need to be modified or replaced in light of current realities.
Ok. Replaced with what? Crypto sure looks tempting right now. I have a small amount in ETHE (Grayscale Ethereum) that swings up and down but currently is at 100% profit after a few months. But if crypto isn’t a faith put, I don’t know what is. I don’t have the stomach to own more than about 1% of my total.

So replace gold with what? Replace cash with what?
(disclosure: in my case, the answer is stocks, and has been for a while. I’m going to take a beating when stocks drop).

If we don’t know what the replacement is, perhaps the debate is over before it starts.
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Re: A worthwhile read for all PP'ers

Post by Kevin K. » Thu Oct 21, 2021 9:29 am

dualstow wrote:
Thu Oct 21, 2021 7:19 am
Kevin K. wrote:
Wed Oct 20, 2021 6:01 pm

So what's up for discussion here is whether half of the PP's assets need to be modified or replaced in light of current realities.
Ok. Replaced with what? Crypto sure looks tempting right now. I have a small amount in ETHE (Grayscale Ethereum) that swings up and down but currently is at 100% profit after a few months. But if crypto isn’t a faith put, I don’t know what is. I don’t have the stomach to own more than about 1% of my total.

So replace gold with what? Replace cash with what?
(disclosure: in my case, the answer is stocks, and has been for a while. I’m going to take a beating when stocks drop).

If we don’t know what the replacement is, perhaps the debate is over before it starts.
Thanks for the thoughtful comments and questions dualstow.

It seems to me that gold remains a unique asset. You can't make jewelry out of crypto and you don't need a massive bank of electricity-sucking computers to create gold out of thin air. But if we're going to look at replacing some or all of the gold in the PP with something else, we have to start by acknowledging that Harry Browne's original reasons for including gold were based on the largely incorrect idea that it's a great inflation hedge. From Tyler's article on gold on Portfolio Charts:

"The most common explanation for the role gold plays in a portfolio is that it’s a store of value that protects your savings against the wealth-eroding effects of inflation. Gold critics, however, have pointed out that this assertion is not actually backed up by the historical data. Honestly, they have a point...

When real interest rates are very low or negative, gold does well because investors prefer not to lose purchasing power on a “safe” investment….Because real interest rates are affected by inflation, gold does indirectly protect agains very sharp inflation that craters real rates. But it can also respond strongly even in times of low inflation as rates fall to particularly low levels like we’re seeing today." [note that this article was written prior to the current sharp spike in inflation].

In rereading that article for the nth time it seems like what it comes down to is that gold has been real money and a store of value for thousands of years and all fiat currencies come and go; gold is truly uncorrelated with stocks and bonds, and it generally does very well to combat currency debasement/money printing. I recall desert and maybe a few other knowledgeable posters on these forums also referring to gold as SHTF insurance - which is another tacit way of saying "I don't really know what it does or how it does it but I wanna own some." Browne of course was not just a gold bug but an ardent libertarian and I'd guess that an asset like crypto that operates outside of government control (at least for now) would've appealed to him. On the other hand, the idea of replacing gold with crypto in the PP seems to violate at least three of his famous 16 rules:

"Rule #3: Recognize the difference between investing and speculating.

Rule #9: Don't ever do anything you don't understand. It's better to leave your money in Treasury bills than to take chances with investments you don't fully comprehend.

Rule #12: Speculate only with money you can afford to lose."

I guess my provisional answer to the "what replaces gold?" question would be that there is no perfect replacement but that iBonds provide the guaranteed inflation protection that gold has never offered, short TIPS like VTIP may have a role to play, and globally diversified equities, possibly with a tilt to small-cap and value, will probably have to suffice for the rest. Mind you this is all conjecture - I have no immediate plans to change anything in my GB. But a 17th rule that surely should be added to Mr. Browne's estimable 16 is: The future is not the past: it really may be different this time.
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Re: A worthwhile read for all PP'ers

Post by dualstow » Thu Oct 21, 2021 10:02 am

I really appreciate the follow-up, Kevin.

Yes! Those rules you posted are right on.
You know the zen koan in which the zen master says “when you drink a cup of tea and when I drink a cup of tea it’s not the same thing”?
When I watched ETHE (the ethereum fund) double in a month, I did not experience glee. The whole thing felt stupid. It still does. For those who better understand how crypto works and how it may fit into the economy (and into the collective psyche of investors), the swings are something that can be taken in stride. It’s just a new technology maturing. For me, in short, it’s something I don’t understand. Not enough, anyway. And so 1% is my participation.

iBonds, sadly, are limited to $10,000 a year not counting that tax refund trick. If memory serves, there was a high limit like 60,000 or 100,000 when I started bying the paper iBonds. Wish I had bought $100K instead of the 2,000 I put in that first year. O0 But, they continue to look like a sweet deal and a no-brainer.
Browne of course was not just a gold bug
I think it’s funny that a great many of us came to the pp from all stocks whereas when he first developed it, it wasn’t unusal for some of his followers to have arrived from mostly gold and precious metals.
I have no immediate plans to change anything in my GB
I don’t have drastic changes ahead either. Everything you’ve posted is good food for thought and yet I don’t know where else to turn. If anything, I may reduce stocks if there is yet another melt-up this winter. I’ve been selling vp stocks prematurely for years. Why stop now? O0

I’m also thinking about the one-time portfolio check you posted about recently and how the advisor was not shy about dismissing gold. For a lot of people out there, for the majority, gold isn’t even on their radar. I will continue to envy them until, of course, stocks go down 70%.

The S&P did nothing from 2000 to 2010, but look at it now. Gold still has time to impress, and then we’ll see a very different trend in posts and threads.
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Re: A worthwhile read for all PP'ers

Post by bitcoininthevp » Thu Oct 21, 2021 12:06 pm

If you take out the long bonds, you are speculating that there will not be continued deflation. Likewise with cash/cash equivalents.

Harry mentioned Gold is the worlds second favorite money. And it actually ISNT a good inflation hedge in the short term/smaller inflations. I could see a holding of BTC/GLD ratio that matches the "market cap" of each as a "reasonable" way to have a fluid approach to recreating "the worlds second favorite money" in this modern time.

TIPS are a bad idea as they are based on government stats that influence their price, government can buy or sell them to influence the price further, all while you are using those TIPS to supposedly help you combat government misbehavior in the money! Financial repression is coming and things like TIPS will be destroyed, I think.
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Re: A worthwhile read for all PP'ers

Post by dualstow » Thu Oct 21, 2021 1:26 pm

bitcoininthevp wrote:
Thu Oct 21, 2021 12:06 pm
..
TIPS are a bad idea as they are based on government stats that influence their price, government can buy or sell them to influence the price further, all while you are using those TIPS to supposedly help you combat government misbehavior in the money! Financial repression is coming and things like TIPS will be destroyed, I think.
I think CraigR and MedTex wrote something like, “Why buy fire insurance from the arsonist?”
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Re: A worthwhile read for all PP'ers

Post by flyingpylon » Thu Oct 21, 2021 3:39 pm

Umm... Kevin, was that you? ;D
2021-10-21_16-34-24.png
2021-10-21_16-34-24.png (122.48 KiB) Viewed 10308 times
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Re: A worthwhile read for all PP'ers

Post by Kevin K. » Thu Oct 21, 2021 5:50 pm

flyingpylon wrote:
Thu Oct 21, 2021 3:39 pm
Umm... Kevin, was that you? ;D

2021-10-21_16-34-24.png
Yeah it was me, but any resemblance to Samuel L. Jackson is purely coincidental. ;)
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Re: A worthwhile read for all PP'ers

Post by Kriegsspiel » Thu Oct 21, 2021 6:13 pm

flyingpylon wrote:
Thu Oct 21, 2021 3:39 pm
Umm... Kevin, was that you? ;D

2021-10-21_16-34-24.png
LOL
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Re: A worthwhile read for all PP'ers

Post by Kevin K. » Thu Oct 21, 2021 6:21 pm

bitcoininthevp wrote:
Thu Oct 21, 2021 12:06 pm
If you take out the long bonds, you are speculating that there will not be continued deflation. Likewise with cash/cash equivalents.

Devil's advocate: If you allocate 25% to long bonds you're buying very expensive insurance against one of the least likely economic conditions. And it's also very weak insurance insurance because unless interest rates not only go negative but stay there you don't have much deflation protection anyway. In short, a full 25% for deflation protection never made sense and with interest rates being where they are now it makes even less. As for cash, it provides moderate inflation protection but not deflation protection - and at this point the only sure thing it guarantees is dry powder that loses ~2-5% annually to inflation


Harry mentioned Gold is the worlds second favorite money. And it actually ISNT a good inflation hedge in the short term/smaller inflations. I could see a holding of BTC/GLD ratio that matches the "market cap" of each as a "reasonable" way to have a fluid approach to recreating "the worlds second favorite money" in this modern time.

Not sure what you mean here. Gold is currency but it's not widely used as money and isn't even included in lists of the world's most popular currencies.

TIPS are a bad idea as they are based on government stats that influence their price, government can buy or sell them to influence the price further, all while you are using those TIPS to supposedly help you combat government misbehavior in the money! Financial repression is coming and things like TIPS will be destroyed, I think.
Yeah I understand that old "don't buy your insurance from the arsonist" argument and kind of agree with it, but if there's one thing we've learned during this pandemic is that the Fed's willingness to use liquidity to suppress interest rates, debase the value of the dollar and inflate the value of risk assets knows no bounds. TIPS are a small part of the Treasury market. I'm a lot more concerned about the way government misbehavior affects the yields of nominal Treasuries of all durations - not to mention our politician's ongoing willingness to undermine "full faith and credit" promises by playing stupid games of chicken with the debt ceiling. Sure seems like there's a good chance stupidity will get the job done before financial repression even gets an at-bat.
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Re: A worthwhile read for all PP'ers

Post by jalanlong » Tue Oct 26, 2021 12:48 pm

I guess my provisional answer to the "what replaces gold?" question would be that there is no perfect replacement but that iBonds provide the guaranteed inflation protection that gold has never offered

I think that one of the original reasons for the inclusion of gold is that gold is the one asset which has no counterparty risk. By replacing it with a government bond then you are adding yet another slice of the portfolio that depends on government keeping its promises.
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