Sunday, January 7, 2018

Bitcoin; The mechanics, the value. Case studies in the value of cryptographic currencies



How cryptographic currencies brought about the collapse of centralized banking, government controlled finance, and leveled global income wealth disparity. In the next decade you will be wondering why you ever used a centralized currency.

I’m sure that the subheading seems fairly grandiose! However, I can assure you, every word of will become true, and will come true sooner than you think. I have been privliged to interview people vastly more intelligent than I, there are plenty of them.  Programmers, investment bankers, and even people who use cryptography in their home countries as a primary currency…..they all concur. 
The currency of the future will be person to person (P2P), meaning there is no intermediary like a bank or government.  It will be digital, although if you really wanted to you could print off the bitcoin cryptography and reenter it later.  It will be 100% transparent, made from an open source code.  It will be based on block chain technology.  And oh yes, one more thing………it will be here before the next decade is over.

For those of you who are busy running on the treadmill of modern day survival, and I say this with absolutely no disrespect intended. You are probably too busy to read, research, or ask experts about cryptographic currencies like bitcoin.  You probably have seen it on “the news” or even the Facebook news feed.  There are some very powerful people putting out lots of misinformation on cryptography, and for very good reason.  It could obliterate their industry, way of life, and their wealth.  In the first part of this multi part series I will explain what Bitcoin, and other cryptographics are, and are NOT!
Cryptographics (bitcoin) are NOT an investment tool, they are not a stock or bond, they are not a fad, they are not the exclusive currency for criminal activity, they are not owned by any governmental body or bank or corporation, they are not tangible, they are not a scam, and they are not owned by a Japanese guy named Satoshi Nakamoto……they are also not a sock, fish, or coffee cup.
Imagine you have a $10,000 bill, yes they exist and Salmon P. Chase is on the front, and you want to use it to buy a car.  You want to make sure that you have a valid bill of sale. Of course you want it to be difficult to forge, and impossible to destroy.  Now imagine that you could write the contract on that $10,000 bill, and then transfer it to the seller.  With cryptographics, like Bitcoin, the contract will be enshrined in the block chain.  The block chain is the digital ledger that tracks every single Bitcoin transaction ever completed, for as long as there are computers the Bitcoin block chain will exist.  Both you and the seller will have access to this ledger, in your digital wallets.  It can never be altered. The same could be done for any contract entered in to: land, business purchases, legal agreements etc. 

This aspect alone, gives bitcoin an intrinsic value.  Gold is not intrinsically valuable.  It is heavy and is not used in industrial production.  Currencies have value, and have throughout history, because they are a contractual obligation between two parties.  A promise.  More than that, as the value of a currency is recognized by an entire group or society of people the value increases.  The contract, or promise of value is fundamental to the value of any fiat monetary system.  This could not have been better exemplified than during the monetary crisis that occurred in Venezuela over recent years. Although there are many examples of currency devaluing to almost nothing in modern times, Venezuela is noteworthy. Why? Because it is a large scale case study in trust, and it happened at a time when cryptographics had proven themselves as a globally recognized store of value.
While the Venezuelan people have had most of their savings wiped out, some have managed to purchase crypto currencies, bitcoin and the like.  Their government money, a promissory store of value just like any other fiat currency, is no longer trusted.  It is not trusted by them, or anyone else in the global market.  The trust and promise of value is gone, and so the money is worth as much as the paper it is printed on. Possibly even less in some cases, since toilet paper is scarce in the collapsing nation.  It is worth noting that at one point, less than 20 years ago, Venezuela was one of the wealthiest south American nations!  People there have turned to cryptographics precisely because of the promissory value that they hold. 

If you wanted to take the time to read the source code for Bitcoin, or another crypto currency, you could find out exactly how many units of currency will be created, and when the minting of the cyber currency will stop. For bitcoin that number will be $21 million.  Take a moment to think about what that means.  The U.S. Government has a policy of increasing the monetary supply by 2% yearly. This means your money is worth $2 less for every hundred you save each year.  Most 401K plans have a limit of $18,500, this means that if you max out your retirement fund it is worth $370 less by years end! This is not a political, but economic observation. In the case of Venezuela the government, printing of currency resulted in mass inflation, devaluation, and destruction of almost all savings. With a cryptographic currency, this is impossible.

What if people forge Bitcoin? After all, it’s just made up.  I would like to point out that the major backing of fiat currency, the USD for instance, is men with guns.  All currencies are “made up” and poses no actual value.  Forging a cryptographic currency would be both cost prohibitive, as well as difficult. Since the computer network that manages the ledger, the block chain, for bitcoin now contains more computing power than all of googles resources combined it is very unlikely that it could be hacked.  In addition the creation of false cryptocurrency would result in an imbalance in the ledger which would be easily and quickly detectable.  After all, how could a dollar bill exist in two places at once, with the same serial number?  Every transaction increases the overall level of encryption.  With every use cryptographics become ever more difficult to falsify.

Where do Bitcoins, and other cryptographic currencies come from? When a mommy and daddy bitcoin get married and they love each other very much, they make a baby bitcoin……Actually bitcoin, and most cryptographic currencies rely on a global computer network.  This network is made up of independently organized operators who use an open source computer program, a program that anyone can access for free, which solves equations creating layers of encryption for the block chain further securing the digital ledger which comprises the basis of security and openness for the digital currency. For the use of their computing power these people, referred to as bitcoin miners, are awarded bitcoins by the cryptographic algorhythem. Imagine you mint currency for the US government.  For every ten coins you produce, the govt gives you two. Bitcoin is similar to this. However, unlike a physical arrangement the block chain base code, and other miners prohibit forgery. A forged unit of bitcoin would not match the ‘serial number’ sequence that the source code provides for the distribution of bitcoins awarded for mining.

Who regulates/owns Bitcoin and other cryptographics? Simply put, no one and everyone. Decentralization of ownership is part of the founding argument for cryptographics. The entire world will agree on a value, competition for computing power will forge the way for securitization of transactions, and as the network becomes ever more secure and evermore expansive, the value of whatever cryptographic emerges increases. Unlike a fiat currency, if someone decides they do not like a certain cryptographic they can decide not to use it. They can use a different one, or even use their local government fiat currency. The value of decentralized ownership provides a network, global in scale, of individuals who both monitor and maintain the digital currency supply. Everyone, at least everyone using the currency, has a dog in the fight when it comes to maintaining security of the digital monetary supply.

Saturday, January 6, 2018

Why the Pacific Northwest housing market will continue to inflate



What is causing the housing bubble in the pacific northwest, namely Portland Oregon and Vancouver wa? The short answer is that there is no bubble. However, as is true in most of life’s circumstances, there are different forces at work which could lend themselves to a collapse.  Or as the finance “experts” call it, a market adjustment.

Firstly, it is worth noting that the practice of mark to market accounting that brought the housing market down, like a poorly constructed house of cards in 2008, is no longer allowed in the mortgage backed securities industry.  Nor is it allowed in the energy, or oil industries where it originated.  The flight of capital in to the energy industry started in the mid 1980’s.  It was brought about as deregulation, under the Bush administration, allowed energy giants most notably Enron, to claim profits on 10-20 year energy contracts on date of promise.  That is to say, I promise to sell you $10 million of oil over a 20 year period.  So I claim it on my balance sheet for today.  Of course I do not have the ten million, and you may go bankrupt.  I also do NOT count inflation, after all ten million in twenty years may not be what it is today! So the market distortion amplifies as time goes on. This is why Enron posted the most reliable, and impressive gains of any company in modern history.

This was not lost on the mortgage industry experts.  They saw an opportunity, so they too lobbied for a change in accounting practices.  Their prayers were answered, and in the 2000’s up went the housing market! It roared! Lending practices relaxed, and few people, if any noticed that the contracts for mortgage revenue streams forecast over thirty years were being put on present day balance sheets! How could profits be claimed on the date of sale? After all, couldn’t that stream default? The mortgage industry disagreed.  The interest revenue was NOT guaranteed……. To be clear Mark to Market Accounting is a great thing, for the stock market, and most fluctuant assets.  However, housing, is NOT a fluctuant asset….at least it probably shouldn’t be.

As the mortgages began to default in the recession of 2008, the bubble popped………..the profits had been tallied, and put in the companies’ portfolios….but the problem was, just like Enron, the accounts were empty! POP went the bubble.

Mark to market accounting was, thankfully removed from use in the mortgage industry in 2008, right after the worst of the collapse when the market hit rock bottom. Lending practices, for loans given out by Uncle Sam through the FHA and Fannie may and Freddie Mack were tightened up, and several other practices were changed. The market floundered for about 7 years, and then started to revive.

What does that mean to the PNW? As noted, the practices that lead to the last collapse have been vanquished. Why then, are the prices in the Portland metro area over 100% what they were in 2008? The answer, is a collar placed on development. The zoning regulations, and urban growth boundary GMA’s put in place have created an artificial inflation in the price of dirt. Dirt is expensive, and impact fees are high. In some areas in rural Clark County Washington fees before the start of development are over $69,000.  This leaves a slim margin after the lot has been purchased for $120-200.  For that reason development is slow, the inventory is small, and prices are high.

While all of the restriction has created unprecedented pressure on the market, there has also been an influx of immigration from areas, like san Francisco where a nice three bedroom two bath home is 1 to 2 million dollars. To these people, many of whom can cyber commute, the livable communities of the PNW and low cost of housing, for only $500K they can get a nice home in Portland, is irresistible. Portland Oregon welcomes more than 5K people per month, while at the same time it opens only 3,500 units per month for housing. The discrepancy is obvious, and the influx has created a market where overbidding for a home is the norm, in most cases by 20%!

Unless GMA’s and GMB change, or are expanded, it is very unlikely that this trend will slow, or abate. From political news, it is clear that neither side of the Columbia River is in any way interested in changing growth boundaries, and so it is this author’s opinion that the unprecedented spike in housing prices will continue until market supply meets demand.  At the present rate of permit issuance vs population influx, it is unlikely that that balance will be reached any time soon.

Saturday, November 18, 2017

Cheer leaders, bread, and circus






Would ENRON be an apt analogy? No, the NFL has not used mark to market accounting to distort profits, or has it?  However, the bonds issued by municipalities, which are perhaps more in line with the 2007 mortgage backed securities collapse may be a better analogy.

A little history
Municipalities, since the 1950’s, have been issuing bonds and levying tourism taxes and property taxes to finance bonds which built stadiums, mass transit, and associated infrastructure for the professional sports industry in the united states.  Prior to 1953 the sports industry provided its own financing, that all changed when the browns built their new stadium (http://money.cnn.com/2016/09/09/news/nfl-sports-stadiums-tax-breaks-taxpayers/index.html).  As the tax subsidized income started flowing the industry inflated, sound like the housing market?

To date no one knows what the total municipal bond debt associated with professional sports venues may be.  To be sure this is not an indictment of the NFL, all of the pro sports leagues suckle at the teat of the burdened tax payer, and their whorish federal cronies.  However, due to the recent drop in ratings and the public outcry, investigation, and loss of govt revenue secondary to the “fake patriotism” investigation, it is my belief that the stadiums primarily used for the NFL and the associated debt obligations are bound to failure.  This will start a landslide of collateral obligations, and may possibly bankrupt entire municipalities.

Between 2000 and 2016 the NFL had convinced municipalities to finance over $13 billion dollars in debt obligations to build stadiums and associated infrastructure for their franchises to use (http://www.foxbusiness.com/features/2017/09/28/nfl-spends-massive-amounts-taxpayer-cash-on-new-stadiums.html).  It should be clear that the NFL and its franchise owners rarely, if ever, buy in to the stadiums they use.  If this lack of confidence is not a red flag, I’m not sure what is.  If a stadium is a “good deal” wouldn’t you want to buy it?  Could I be wrong?

Well, according to city fillings Philadelphia still owes over $160k on veterans stadium, which was demolished over ten years ago.  That is comparable to the “super dome” in Seattle, which the city finished paying off just 15 years ago long after its demolition date.  The list of stadium debt obligations, which never seem to pay off the stadiums which don’t exist anymore, seems to go on forever (https://www.reuters.com/article/us-sports-nfl-stadiums-insight/with-nfl-rams-gone-st-louis-still-stuck-with-stadium-debt-idUSKCN0VC0EP).  Of course the tax payers in the districts are still obligated, and will pay for the bonds.

Even more disturbing is that while the NFL continued to lose viewers, over 20%-24% in 2013-2015, the credit and bond obligations issued to the league continued to increase at an alarming rate (https://www.forbes.com/sites/briangoff/2017/10/23/nfl-losing-viewers-at-alarming-rate-but-faces-limits-on-its-response/#41ee79cf4212).

Just like anyone on the fringe of inevitable catastrophe the franchises took desperate measures, even though few if anyone seemed to notice.  With a stated TV market value of over $18 billion dollars, similar to the mark to market accounting model Enron used,  and a credit rating of A+ by FITCH, Wall Street bit down hard!  The NFL hit Wall Street hard and right between the numbers so to speak, and the banks hit back with hundreds of millions of dollars of credit extended from JP Morgan chase and others (http://m.sportsbusinessdaily.com/Journal/Issues/2001/09/20010910/No-Topic-Name/NFL-Debt-A-Hit-With-Investors.aspx). 2001 was a great year for the NFL franchise owners and the credit flowed freely, and cheaply.  

As the noose tightens:
As the salad years passed by, and the US military industrial complex needed good press, the NFL found another tax subsidized nipple on which to nurse. The military was all too happy to pay an undisclosed amount of discretionary money for “patriotic” events and displays during NFL games. The exact amount of funds disbursement will, most likely, never be known.  However, data released by the senate armed services committee in 2015 after a discretionary audit showed that the US military had paid at least $6.8 million dollars to teams to spur patriotism the prior year
 “For example, taxpayers paid $49,000 to the Milwaukee Brewers to allow the Wisconsin Army National Guard to sponsor the Sunday singing of "God Bless America." In another contract, the New York Jets were paid $20,000 to "recognize one to two New Jersey Army National Guard soldiers as hometown heroes." (https://www.npr.org/sections/thetwo-way/2015/11/05/454834662/pentagon-paid-sports-teams-millions-for-paid-patriotism-events). 
Since 2015 this practice has ended, and tax payers have decided almost en mass that they can no longer afford to finance the Romanesque circus of the ultra-wealthy.  The recent tax legislation reflects this trend.  It would change the tax free income generated by bondholders who lend money to municipalities to fund stadiums from a $3.2 billion dollar per year loss, to a $3.7 billion dollar a year income for the IRS (http://money.cnn.com/2016/09/09/news/nfl-sports-stadiums-tax-breaks-taxpayers/index.html). 

Landslides happen all at once:
It is worth noting that before the collapse of the housing market, Enron, and almost any other financial catastrophe in the last 200 years those captaining whatever titanic disaster that was happening always deny anything is wrong, right up until the ship sinks.  My favorite was the “wizard of finance” Allan Greenspan saying to reporters that the mortgage backed securities industry was in absolutely no danger, just days before major banks almost went bankrupt due to insolvent housing bond portfolios.  

The NFL will be no different. Accounting can be used in many ways, and it can be used to make a dead company look alive.  Enron used mark to market, the housing market used collateralized debt obligations, and denied the bonds in their housing portfolios were worthless paper.  
As viewership drops, and regardless of what people say it has, profits will plunge. Wall Street investment banks will realize that their investments are not safe, and they will require more interest for loans.  And since credit is all that is keeping this dying industry alive that will be the nail in the coffin.  Stadium debts will start to balloon as people realize the industry is insolvent. 
All of the hotel taxes, rental car taxes, restaurant taxes, property taxes and instruments normally used to pay the bond debt for pro stadiums won’t be able to pay the principal of the stadium bond debts, and eventually the bonds issued by the municipalities will go in to default (https://www.usatoday.com/story/sports/2016/08/22/nfl-mlb-stadium-tax-hotel-tourists-fans/88489236/).  The story is sad, as the cities and state districts dependent upon the revenue of professional sports decline the debt collapse will spread in to other non sport related bond portfolios. 

The students of the Ohio school system suffered a loss of over $119 million so that the Bengals could maintain their stadium.  The budget shortfall for the Ohio public schools was just the tip of the iceberg, and to prevent default the state also cut $26.3 million from public health funding to keep the stadium and bond debt solvent (https://www.theatlantic.com/magazine/archive/2013/10/how-the-nfl-fleeces-taxpayers/309448/).  As the debt collapse spreads out, and municipalities become insolvent they will not be able to borrow and pay the interest on the debt for even the other services for which they have issued bond debt. 

It would be overly speculative and simplistic to say that any city or state with bond debt that is related to the construction and maintenance of stadiums will default and fail to pay their other bond debt obligations.  However, I would not be surprised to see this trend in the future.

Of course, it is entirely possible, and indeed probable, that govt will step in and prevent collapse.  Again, as in the 2008 crisis, the tax payer will be put on the hook for the speculation of the ultra wealthy franchise owners. Just as they were for the auto industry executives, and the banking lenders……

I have not been able to find any finance blogs with anything about NFL bond debt defaults looming.  If you have an opinion, with data to back it up, please send it my way.
Thanks,
Zach