The market drop, recession fears, bitcoin, and the Greater Fool Theory

[Norman Bernstein]

I've been a huge fan of Warren Buffet, and his partner, Charlie Munger, for years now. These two guys are a couple of the most successful investors in the history of the market, and it's all based on remarkably simple principles involving the evaluation of a company's value, its long term prospects, and the quality of its management. So much of what they say is just plain old common sense...

...yet, they really don't have much insight to provide for the ordinary retail investor, like most of us. When asked, Buffet falls back on the John Bogle advice: buy index funds, for the sake of diversity and low expenses.

Regardless, one of the tenets of their philosophy is the 'long term' aspect... the idea that solid, profitable companies will, over the long term, deliver big rewards to investors. I think it's certainly true; stocks of very reputable companies I bought 30 or 40 years ago have rewarded me rather handsomely.

So, with the stock market falling off the cliff, fear overcomes greed, and there's been a substantial sell-off. How far down will it go, nobody knows... but if you were looking for clues as to why it's dropped, and possibly why it will recover, there's a lot to consider.

The bad news: the Covid pandemic, in addition to killing over 1 million Americans to date (and many more, world wide), made a mess of supply chains and logistics. Shortages resulted in rising prices. The War in Ukraine resulted in a constriction of the flow of oil and gas from Russia, hurting Europe the most, but spilling over into the US to a degree, with gas prices now over $5 in most of the US, and even higher in California. Worst of all, US corporations took advantage of the situation. In a number of recorded investor calls, CEO's shamelessly admitted that they were taking advantage of high inflation to cover big price increases.

What makes this all frustrating is that there are some contradictory factors. First, unemployment is at record lows, and jobs are going unfilled all over the place (which ought to argue for more immigration, were it not for the cultural and racial xenophobia on the right). Corporate profits are very high, indicating that US corps COULD make bigger investments in new technologies... although in all likelihood, they'l just burn the profits in stock buybacks and executive compensation.

One of the things that Buffet and Munger have been consistent about is disparaging bitcoin. Buffet makes a very important (and obvious) point: bitcoin is a non-productive asset. Ordinary stocks actually produce something; the ones I own produce profits. The ones I don't like, produce expectations based on ultimately becoming productive. Bitcoin, on the other hand, cannot EVER produce a damn thing. Its existence is completely based on the 'greater fool' theory... the idea that, if you pay $X for a bitcoin, you'll always be able to find someone who will buy it from you for $X+++.

It is no different than a Ponzi scheme, except that it doesn't require a pyramid.

I do feel a bit sorry for those who got sucked in to crypto (and its even stupider cousin, NFT's). They're like believers of the political 'big lie', except in their case, it's the 'financial big lie'. The reality is that bitcoin has NO intrinsic value whatsoever. It's not all that dissimilar to gold, whose commercial value, in terms of use, is actually quite small.

Warren Buffet provides the best example. He say that all the gold in the world that has ever been mined could be cast into a cube 67 feet wide, 67 feet deep, and 67 feet tall. If you took the value of that gold, you could buy ALL the farmland in America, 7 corporations the size of Chevron or larger, and still have $1 Trillion dollars left over for pocket money. The farmland and corporations would produce phenomenal amounts of profit... the gold cube, on the other hand, would produce NOTHING.

Will crypto collapse? I don't think so, although it will redefine the term 'volatility'. As long as there is a substantial supply of 'greater fools', we'll always have schemes and scams like crypto.

[Andrew2]

Bitcoins aderants tell us we just don't understand it, if we question.
I can remember Australian mining shares, along with early card schemes, i.e. ponzi games. Warren has often said he will not invest in things he doesn't understand. If he can't understand Bitcoin, how can we?

[Landrith]

Silver isn't sexy but it is a scarce asset unlike cryptos with both manufacturing use demand and accepted store of wealth value. Unlike crypto's libertarian promise, silver and gold both have value independent of an issuing state. And in the end, Silver was more liquid or exchangeable with less transaction cost than cryptos. Also you get the bonus of a subsidized purchase price as long as the AngloAmerican states are propping up their fiat currencies.

I would have said US government bonds as safe and through the decades a certain return. I don't think that is true of the future as we transition out of the Dollar being the world reserve currency and our global military intimidation value is on the wane.

[Too Little Time]

...yet, they really don't have much insight to provide for the ordinary retail investor, like most of us. When asked, Buffet falls back on the John Bogle advice: buy index funds, for the sake of diversity and low expenses.

Regardless, one of the tenets of their philosophy is the 'long term' aspect... the idea that solid, profitable companies will, over the long term, deliver big rewards to investors. I think it's certainly true; stocks of very reputable companies I bought 30 or 40 years ago have rewarded me rather handsomely.

So, with the stock market falling off the cliff, fear overcomes greed, ...

You continually express your fear.

I believe Buffet made a recommendation of S&P500 index funds. Not just any index fund. As I keep saying the 30 year 10% annualized returns (with 2 exceptions since 1975 - 9.9% ending in 2019, and 9.8% ending in 2017) that the S&P500 has returned is enough for most. I am sure some of the greedier are unhappy.

And some of the greedier are unhappy with the shorter term returns of the S&P500. 9.0% for the last 20 years is above expectations. The 8.6% from the market high in 2007 until today above average. The 13.5% for the last 10 years is above average.

Or maybe you express your greed. The stock market is not a good place to invest your lunch money in the morning to pay for your meal later today.

[Canoez]

I've been a huge fan of Warren Buffet, and his partner, Charlie Munger, for years now. These two guys are a couple of the most successful investors in the history of the market, and it's all based on remarkably simple principles involving the evaluation of a company's value, its long term prospects, and the quality of its management. So much of what they say is just plain old common sense...

...yet, they really don't have much insight to provide for the ordinary retail investor, like most of us. When asked, Buffet falls back on the John Bogle advice: buy index funds, for the sake of diversity and low expenses.

Regardless, one of the tenets of their philosophy is the 'long term' aspect... the idea that solid, profitable companies will, over the long term, deliver big rewards to investors. I think it's certainly true; stocks of very reputable companies I bought 30 or 40 years ago have rewarded me rather handsomely.

So, with the stock market falling off the cliff, fear overcomes greed, and there's been a substantial sell-off. How far down will it go, nobody knows... but if you were looking for clues as to why it's dropped, and possibly why it will recover, there's a lot to consider.

The bad news: the Covid pandemic, in addition to killing over 1 million Americans to date (and many more, world wide), made a mess of supply chains and logistics. Shortages resulted in rising prices. The War in Ukraine resulted in a constriction of the flow of oil and gas from Russia, hurting Europe the most, but spilling over into the US to a degree, with gas prices now over $5 in most of the US, and even higher in California. Worst of all, US corporations took advantage of the situation. In a number of recorded investor calls, CEO's shamelessly admitted that they were taking advantage of high inflation to cover big price increases.

What makes this all frustrating is that there are some contradictory factors. First, unemployment is at record lows, and jobs are going unfilled all over the place (which ought to argue for more immigration, were it not for the cultural and racial xenophobia on the right). Corporate profits are very high, indicating that US corps COULD make bigger investments in new technologies... although in all likelihood, they'l just burn the profits in stock buybacks and executive compensation.

One of the things that Buffet and Munger have been consistent about is disparaging bitcoin. Buffet makes a very important (and obvious) point: bitcoin is a non-productive asset. Ordinary stocks actually produce something; the ones I own produce profits. The ones I don't like, produce expectations based on ultimately becoming productive. Bitcoin, on the other hand, cannot EVER produce a damn thing. Its existence is completely based on the 'greater fool' theory... the idea that, if you pay $X for a bitcoin, you'll always be able to find someone who will buy it from you for $X+++.

It is no different than a Ponzi scheme, except that it doesn't require a pyramid.

I do feel a bit sorry for those who got sucked in to crypto (and its even stupider cousin, NFT's). They're like believers of the political 'big lie', except in their case, it's the 'financial big lie'. The reality is that bitcoin has NO intrinsic value whatsoever. It's not all that dissimilar to gold, whose commercial value, in terms of use, is actually quite small.

Warren Buffet provides the best example. He say that all the gold in the world that has ever been mined could be cast into a cube 67 feet wide, 67 feet deep, and 67 feet tall. If you took the value of that gold, you could buy ALL the farmland in America, 7 corporations the size of Chevron or larger, and still have $1 Trillion dollars left over for pocket money. The farmland and corporations would produce phenomenal amounts of profit... the gold cube, on the other hand, would produce NOTHING.

Will crypto collapse? I don't think so, although it will redefine the term 'volatility'. As long as there is a substantial supply of 'greater fools', we'll always have schemes and scams like crypto.

Bill Gates echoed that sentiment just recently - that Bitcoin and NFT are both "a sham".

[Decourcy]

Bitcoin is a means of exchange, a currency, but not issued by a bank or country. I’m fine with it as a concept, but what I don’t get is “investing” in it. To me that’s like investing $10000 on a $100 bill because there is excitement in the market and lots of other people are doing it. Tulips. Nothing but Dutch tulips.

[bluedog225]

So are beanie babies��

[Decourcy]

So are beanie babies��

Yup, and Tesla stock, art, and so many other things. But I think people get confused by the crossover between currency and investment. Bitcoin is treated as an investment, but it isn’t really there.
At least you can play with the beanie baby after the market for them crashes.

[peb]

Fwiw, and I can promise you it's worth nothing, this week seems to me to have some signs of bottoming out. Mainly, there are some asset classes that have held up ok and have gotten wiped out this week: utilities, some reits, large cap dividend stocks, consumer staples. Also, energy stocks have been on a tear, but have had significant declines. This feels a bit like a capitulation moment in the market, a lot of people giving up. That someimes the first sign of a bottom.

[peb]

Bitcoin is a means of exchange, a currency, but not issued by a bank or country. I’m fine with it as a concept, but what I don’t get is “investing” in it. To me that’s like investing $10000 on a $100 bill because there is excitement in the market and lots of other people are doing it. Tulips. Nothing but Dutch tulips.

3xcept it's not really a means of exchange, is it? You can't buy much with it, and companies who accept it are really pricing in dollars and doing an instant exchange.
It's not a store of value either.

I don't know what Bitcoin is, but I do not belief it is a form of money. Not any currency one can actually use like money in the real world.

[Landrith]

We learned from a decade of shadow banning and stronger "safe guards' built into the Internet by our bureaucratic dictatorship that a message based "currency" or medium of exchange can be simply shut off. And when the central banks are ready with their own digital currency to avoid even the printing costs for their fiat script, they will first choke out uncontrollable cryptos from any public forum through rules, laws, and taxes. Shortly afterwards the Anglo American intelligence agencies (which themselves are creations of the shareholders of those central banks) will engineer their termination. Been there, seen that. And you won't even have a tulip bulb to plant...

[Decourcy]

It was designed as a currency. The fact we don’t use it as such is due to market excitement

[Norman Bernstein]

The giveaway is obvious. If you ask what a bitcoin is worth, the answer is quoted… in dollars

[Norman Bernstein]

Fwiw, and I can promise you it's worth nothing, this week seems to me to have some signs of bottoming out. Mainly, there are some asset classes that have held up ok and have gotten wiped out this week: utilities, some reits, large cap dividend stocks, consumer staples. Also, energy stocks have been on a tear, but have had significant declines. This feels a bit like a capitulation moment in the market, a lot of people giving up. That someimes the first sign of a bottom.

I agree completely. Although no investor can escape a bear market completely, it’s worth noting that my own portfolio, consisting almost exclusively of large cap strongly branded stocks that all pay dividends, is down less than half the S&P 500 for the past month, past quarter, and eveN the past year…

…and the icing on the cake: none of those stocks have stopped paying the dividends.

[Decourcy]

The giveaway is obvious. If you ask what a bitcoin is worth, the answer is quoted… in dollars

Sure. But if I ask what pesos are worth you’d tell me in dollars too….

[Canoez]

IMO, Bitcoin and the rest of the Crypto bunch are like religion. They only have value if you believe.

[Paul Pless]

IMO, Bitcoin and the rest of the Crypto bunch are like religion. They only have value if you believe.

much like the dollar

[Canoez]

much like the dollar

Yeah, but without a country to back it up.

[peb]

I agree completely. Although no investor can escape a bear market completely, it’s worth noting that my own portfolio, consisting almost exclusively of large cap strongly branded stocks that all pay dividends, is down less than half the S&P 500 for the past month, past quarter, and eveN the past year…

…and the icing on the cake: none of those stocks have stopped paying the dividends.

Norman, have your large cap divi stocks taken a big hit the past week? Curious if you are seeing what I am.

[Norman Bernstein]

Norman, have your large cap divi stocks taken a big hit the past week? Curious if you are seeing what I am.

Well, depends on your definition of what a ‘big hit’ is, I suppose. My Schwab platform doesn’t provide a one week chart… it provides last quarter, last three months, year to date, one year, and since 1/1/2009, which I guess is when this particular software development started. On the first four time periods mentioned, I’m down about half as much as the S&P 500, and somewhat less than what Schwab describes as their ‘moderately aggressive’ portfolio benchmark. So far, none of my stocks have cut dividends, and since the total value includes the effects of dividends, this must be factored in. My estimated total dividend yield is around 3.2%, so when compared to the S&P 500, I’m still down less by a few percent… which is what the portfolio was designed to do. I’m not yet 72, so I have drawn nothing from my IRA’s (where most of my money is), but if I were, the RMD in the first few years would be more than I need to supplement my SS. In an absolutely ideal world, the growth of the investments in the IRA’s would about equal the RMD, so the capital would be preserved for quite a while. Of course, it’s not an ideal world… if it were, my wife wouldn’t have advanced Parkinson’s, and I wouldn’t be faced with the possibility of having to put her into some form of institutional care… which would blow up my portfolio far faster.

[Decourcy]

Yeah, but without a country to back it up.

That’s not always a guarantee of value…..

[Canoez]

That’s not always a guarantee of value…..

Continues to be a pretty good guarantee for most countries. So good in fact that other countries value a particular country’s currency and even use it as a reserve currency.

[Rigadog]

You really shouldn't lump Bitcoin in with all of crypto. Yes, it does seem to me that Bitcoin has little utility, whereas owning stock in Exxon or Phillip Morris represents a share in those companies and the sale of their products. I get that. But I don't think Crypto as a whole is a scam; it really depends on which "coin" you are looking at. My sense is that all of us commenting here are of a certain age. I am 65 and I sort of understand what Crypto is but I admit that the finer details are lost on me. It's easy to throw stones at it now that it had fallen from its crazy heights. But the people who developed it are some of the most brilliant people in the world, and the stuff that has utility like Ethereum or Solana or ADA has a lot of utility. Also some of these computer geniuses are quite altruistic, wanting to democratize access to capital and take the middle man out of banking transactions.

If you want to understand the potential for this technology watch this:

https://www.youtube.com/watch?v=97ufCT6lQcY

Here is the boy genius who created Ethereum:

https://www.youtube.com/watch?v=WSN5BaCzsbo


Using blockchain technology to secure the Grid:

https://www.hindawi.com/journals/wcmc/2022/9065768/

So I wouldn't be too quick to dismiss"Crypto"- it's a lot more than you think.

[Decourcy]

Continues to be a pretty good guarantee for most countries. So good in fact that other countries value a particular country’s currency and even use it as a reserve currency.

Yes, but like all currencies of the past, it will eventually fail and be forgotten. It’s just a matter of when.

[Decourcy]

The thing that really bothers me about Bitcoin is the energy required to “mine” it. I believe it’s around $30000 in electrical cost per coin at this point.

[peb]

You really shouldn't lump Bitcoin in with all of crypto. Yes, it does seem to me that Bitcoin has little utility, whereas owning stock in Exxon or Phillip Morris represents a share in those companies and the sale of their products. I get that. But I don't think Crypto as a whole is a scam; it really depends on which "coin" you are looking at. My sense is that all of us commenting here are of a certain age. I am 65 and I sort of understand what Crypto is but I admit that the finer details are lost on me. It's easy to throw stones at it now that it had fallen from its crazy heights. But the people who developed it are some of the most brilliant people in the world, and the stuff that has utility like Ethereum or Solana or ADA has a lot of utility. Also some of these computer geniuses are quite altruistic, wanting to democratize access to capital and take the middle man out of banking transactions.

If you want to understand the potential for this technology watch this:

https://www.youtube.com/watch?v=97ufCT6lQcY

Here is the boy genius who created Ethereum:

https://www.youtube.com/watch?v=WSN5BaCzsbo


Using blockchain technology to secure the Grid:

https://www.hindawi.com/journals/wcmc/2022/9065768/

So I wouldn't be too quick to dismiss"Crypto"- it's a lot more than you think.

I lump all crypto currencies together at this time. There is a difference between crypto and its underlying technology of blockchain. Blockchain likely has several very beneficial applications. Crupto currencies are built on top of blockchain technology. Crypto currencies do not provide any beneficial service to society that I can see, and it has some significant negative effects.

[Canoez]

You really shouldn't lump Bitcoin in with all of crypto. Yes, it does seem to me that Bitcoin has little utility, whereas owning stock in Exxon or Phillip Morris represents a share in those companies and the sale of their products. I get that. But I don't think Crypto as a whole is a scam; it really depends on which "coin" you are looking at. My sense is that all of us commenting here are of a certain age. I am 65 and I sort of understand what Crypto is but I admit that the finer details are lost on me. It's easy to throw stones at it now that it had fallen from its crazy heights. But the people who developed it are some of the most brilliant people in the world, and the stuff that has utility like Ethereum or Solana or ADA has a lot of utility. Also some of these computer geniuses are quite altruistic, wanting to democratize access to capital and take the middle man out of banking transactions.

If you want to understand the potential for this technology watch this:

https://www.youtube.com/watch?v=97ufCT6lQcY

Here is the boy genius who created Ethereum:

https://www.youtube.com/watch?v=WSN5BaCzsbo


Using blockchain technology to secure the Grid:

https://www.hindawi.com/journals/wcmc/2022/9065768/

So I wouldn't be too quick to dismiss"Crypto"- it's a lot more than you think.

I think Buffet, Munger, and Gates have a pretty clear idea of cryptocurrency generally.

Cryptocurrency created and traded by a corporate entity seems very much like vaporware to me - whichever corporate entity has created it.

As has been pointed out here, crypto-mining, a clear feature of Bitcoin, is energy and equipment intensive - not a great feature from an environmental point of view. I know there are Bitcoin "farms" or "mines" where they run on renewable energy, but you still have all of the equipment and all of the heat generated which does exactly what for the world?

That said, do I think the cryptocurrency experience is useless? For day to day economic exchanges - groceries, gas, a cup of coffee - I view crypto as useless in it's current form. As an example for governments to create electronic currency using blockchain or some other secure means to validate the currency, I think that's where the utility is. I see various governments around the world getting rid of minted and printed currency in favor of some form of electronic currency - but governments will create their own and use their own standards for transfer and exchange between countries.

[peb]

Well, depends on your definition of what a ‘big hit’ is, I suppose. My Schwab platform doesn’t provide a one week chart… it provides last quarter, last three months, year to date, one year, and since 1/1/2009, which I guess is when this particular software development started. On the first four time periods mentioned, I’m down about half as much as the S&P 500, and somewhat less than what Schwab describes as their ‘moderately aggressive’ portfolio benchmark. So far, none of my stocks have cut dividends, and since the total value includes the effects of dividends, this must be factored in. My estimated total dividend yield is around 3.2%, so when compared to the S&P 500, I’m still down less by a few percent… which is what the portfolio was designed to do. I’m not yet 72, so I have drawn nothing from my IRA’s (where most of my money is), but if I were, the RMD in the first few years would be more than I need to supplement my SS. In an absolutely ideal world, the growth of the investments in the IRA’s would about equal the RMD, so the capital would be preserved for quite a while. Of course, it’s not an ideal world… if it were, my wife wouldn’t have advanced Parkinson’s, and I wouldn’t be faced with the possibility of having to put her into some form of institutional care… which would blow up my portfolio far faster.

I am definitely looking at short term, the last few days. Just one more check of my theory about the final washout of the market may be near. Certainly I am not implying having high dividend, large-cap stocks is a bad thing right now. But back to my theory: if I look at DON, an etf of large-cap high dividend stocks, it hovered aroudn 41-45 since the beginning of the year until about 10 days ago. At that time it had a short term peak of about 44. Over the last 7 trading days it fell to 38. Thats a 13% drop in a very short time, it had two very large gap down days. My point is that its a sign of people just giving up on the market in general and selling everything. That is what happens when the market is approaching a bottom or forming a bottom in a bear market. OTOH, I will add that this bear market has been in effect for 6 months. That would be a typical duration of a the downside of a market, but there is a LOT of variability there.

BTW, it does seem like people have quite touting MMT, that experiment may be a failure. Certianly the Federal Reserve seems to think so.

[Canoez]

Yes, but like all currencies of the past, it will eventually fail and be forgotten. It’s just a matter of when.

Do you earn, save and spend in Canadian dollars?

[peb]

I think Buffet, Munger, and Gates have a pretty clear idea of cryptocurrency generally.

Cryptocurrency created and traded by a corporate entity seems very much like vaporware to me - whichever corporate entity has created it.

As has been pointed out here, crypto-mining, a clear feature of Bitcoin, is energy and equipment intensive - not a great feature from an environmental point of view. I know there are Bitcoin "farms" or "mines" where they run on renewable energy, but you still have all of the equipment and all of the heat generated which does exactly what for the world?

That said, do I think the cryptocurrency experience is useless? For day to day economic exchanges - groceries, gas, a cup of coffee - I view crypto as useless in it's current form. As an example for governments to create electronic currency using blockchain or some other secure means to validate the currency, I think that's where the utility is. I see various governments around the world getting rid of minted and printed currency in favor of some form of electronic currency - but governments will create their own and use their own standards for transfer and exchange between countries.

I know that Hernando de Soto has advocated for creating and tracking property ownership for the poor by use of blockchain technology.

[Decourcy]

Do you earn, save and spend in Canadian dollars?

At the moment yes. Canada and Canadian currency will likely last more than my lifespan. But I’m sure the last person to try to use a Roman aureus felt the same. I don’t delude myself into thinking any currency is any more than a temporarily useful invention, or possibly an accepted illusion.

[Canoez]

I know that Hernando de Soto has advocated for creating and tracking property ownership for the poor by use of blockchain technology.

Why just for the "poor"?

[peb]

Why just for the "poor"?

Well, it could work for others, but his interest is in helping the poor. de Soto's thesis has long been that establishing property rights for defacto owners among the poor in third world countries could do a lot for alleviating poverty overtime. His 2000 book "The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else" is, IMO, a very great treatise on the subject. Basically, many of the world's poor, he argues, own some bit of property: perhaps its just the land that their shack is constructed on or a small plot they have been tending a garden for centuries. But they have no legal established claim. As such, they can do such things as borrow against it and of course they are in constant threat of loosing the land. Many countries do not have the administrative infrastructure to remedy this problem. His idea is that block chain technology can be used to establish those abstract records quickly and efficiently. That is likely a poor summary of his thoughts.

[Breakaway]

^ Right.
The flip side being that, unlike the poor, people of means already possess the --wait for it--means to prove and protect property ownership.

K

[Canoez]

At the moment yes. Canada and Canadian currency will likely last more than my lifespan. But I’m sure the last person to try to use a Roman aureus felt the same. I don’t delude myself into thinking any currency is any more than a temporarily useful invention, or possibly an accepted illusion.

Well then, why would you even begin to spout off on currencies issued by government? People just move on to the next thing.