Fear, money and a mirage….

Tuesday 15th August 2017

Fear, money and a mirage….

Have you ever wondered what the world would look like if it were run by crazy people? Well, look out of the window….

Donald Trump and Kim Jong-un have both clambered up the greasy pole – all the way to the very top. Both men insist on sporting loony-tune haircuts and both call the shots at home. But that’s not all they have in common….

Both men are also dangerously unhinged and represent a potentially lethal threat to the whole world and its entire population….

It is to be hoped that there is some serious back-channeling in-play between Washington and Pyonyang. Trump and Kim Jon-un are to diplomacy what two kids tossing a hand-grenade back and forth (with the pin out) are to playground health and safety….

Not content with posturing and sabre rattling on just one front, Trump is also threatening to get involved in Venezuela. ‘I’m not going to rule out a military option,’he told reporters last week before striding out like a Roman emperor onto the golf course….

Venezuela is in a well-documented state of economic crisis. But why that demands a military intervention from the US is unclear. Trump is beginning to look and sound like a guy who grew up watching too many John Wayne films….

Right now, he’s succeeding in making a previous incumbent of the White House, George W Bush, look rational and positively statesmanlike.

That’s no small achievement. Trump clearly has some talent at least. But, unfortunately, no awareness of his own limitations. Something that makes the man genuinely dangerous….

  • A spike of fear….

No wonder the VIX Index blew a gasket and went crackers last week. Markets had a sudden moment of clarity where they appeared to realize Trump is a runaway truck with no brakes to call on….

The VIX is the Chicago Board Options Exchange’s Volatility Index. It expresses the market’s expectation of 30-day volatility based on puts and calls placed
on a range of S&P 500 options.

Some people refer to the VIX Index as the ‘Investor Fear Gauge’. Investor fear is pretty much what the VIX Index measures….

You can view the VIX chart here. And you’ll see that there hasn’t been much in the way of investor fear in recent months….

The VIX has been trading consistently at low levels not seen since 2006. A low VIX figure expresses a lack of fear in the markets. A low figure tells us that the market sees a period of plain sailing ahead….

The market has been seeing nothing but plain sailing ahead for quite some time. Nothing has shaken the market’s belief that things will continue much as they have been going along – with markets sailing relentlessly upwards….

Until last week, that is. Last week the VIX suddenly spiked more than 70%. In other words, the market suddenly expressed fear. Fear that markets values might not continue moving ever upward as they have. Fear that the climate could change….

Much like premium Danish lager, Donald Trump’s antics appear to have the power to influence the parts other recent events – both political and economic – had been unable to reach….

Suddenly the water in the markets feels a little cooler and the surface is a little choppier. The sky is not quite the same shade of azure blue that it was. And what is that black thing floating on the horizon? Is it a cloud? Is it heading this way? Maybe it is….

Chelsea prove a point….

Most punters had Chelsea down as a ‘banker’ at the weekend….

But they got turned over at home by Burnley….

Bookies get rich and punters go broke when odds-on shots get beaten….

It happens frequently. You won’t profit backing big teams at short prices….

Instead, beat the bookies by looking at games differently….

  • A nice problem to have….

Trump has problems. And his actions in response to them could provoke and produce problems down the road for investors who are fully-loaded up in the markets….

But problems are part and parcel of day-to-day life. We all have them. They play-out one way or another. One set of problems is ultimately replaced and superseded by another.

But not all problems are born equal. Some problems are better to have than others….

Take Warren Buffett, for instance. The world’s most famous investor has a problem. Berkshire Hathaway, the conglomerate Buffett has guided over the last 50-years, is sitting on a pile of cash worth $1 billion….

Buffett’s problem is that he and his team need to figure out a way of putting that cash pile to profitable work….

That’s easier said than done in a climate where interest rates are at a 5000-year low and the stock markets have been rising relentlessly for a decade.

Where do you find a decent return with the former? And where do you find bets that’s still represent genuine good value in the latter?

But it’s not a bad problem to have. I can think of worse. And the bottom line is this: too much cash on hand is a great deal better than too little….

And while Buffett might be finding it difficult to identify good investments for his cash right now, he has it on hand – primed and ready – for when the market turns and value opportunities resurface at cheaper prices….

On a much bigger scale, Buffett is perfectly placed to follow the same down-turn formula I recommended myself back in May. [Modest cough] Great minds think alike….

  • Buffett and Bitcoin….

In the meantime, I wonder if Buffett and his team are considering trading some of that $1 billion on the upward surge of Bitcoin. Every other speculator on the block seems to be thinking that way….

I put down a few thoughts on Bitcoin last week. I think it’s a speculation bubble. But, the market pays no attention to me and carries on regardless….

The spectacular/ridiculous (delete as appropriate) rise of Bitcoin continued over the weekend and into Monday when it broke through the $4000 barrier for the first time and touched as high as $4311….

On January 1st Bitcoins were selling at $973. So, in 8.5 months, the cryptocurrency has risen in value by 343%. And the momentum shows no signs of slowing….

Bitcoin is the financial story of the year and, so far at least, it is the momentum trading story of the decade.

The price is flying and the media can’t leave the story alone. More and ever more people are becoming aware of this get-rich-quick opportunity. Speculators are leaping on in ever-increasing numbers and, consequently, the price flies higher still.

  • Soon, we’ll all be millionaires….

A few more years of this and we’ll all be millionaires. None of us will need to work….

Bitcoin looks like the trading formula that simply can’t fail….

Which is the best indication we have that it will. And sooner rather than later….

Just think what Buffett could do for the value of Bitcoin were he to commit his $1 billion war-chest to the Bitcoin market. We might well get to the $50,000 valuation that some Bitcoin bulls and evangelists – all with skin in the game – are busy predicting.

But it won’t happen. Buffet isn’t a fan of Bitcoin. He’s on record saying he ‘wouldn’t be surprised if it wasn’t around in 10- or 20-years….’

His advice is to ‘Stay away from it.’

Why? ‘It’s a mirage basically….’

You can check out pretty much everything Buffett has had to say on Bitcoin right herein just 76 seconds.

It provides much-needed contrast to some of the wildly-ecstatic and overly-optimistic Bitcoin material we’re seeing in the mainstream media day-in and day-out.

Think of it as getting the other side of the Bitcoin story….

That’s how it looks from here….

All the best,

Dave Gibson

Money Truths