Typography

Stock trading on the New York Curb Association market, 1916 This isn't a bitcoin post. But it cribs some ideas from bitcoin and applies them to equity markets. Specifically, I'm going to play around with the idea that if equity markets were to adopt a bitcoin-style distributed ledger system, then some of the destabilizing effects of the so-called latency wars might be mitigated. Historically, most databases and ledgers have been maintained at a central hub. In order to get access to this information, users have had to walk into the building that houses the records, or sign into a server that stores them. Bitcoin, litecoin, Ripple, and other cryptocurrencies all demonstrate the possibility of distributing a database away from its center . Rather than a hub doing all the work, networks of independent nodes can store, maintain, and update the database. Bitcoin's ledger, the blockchain, is probably one of the best examples of a real living distributed database. A few weeks ag...

Real t-bill and bond yields have been falling for decades and are incredibly low right now, even negative (see chart below). With an eye to historical real returns of 2%, folks like Martin Feldstein think that bonds are currently mis-priced and warn that a bond bubble is ready to burst. Investors need to be careful about comparing real interest rates over different time periods. Today's bond is a sleek electronic entry that trades at lightning speed. Your grandfather's bond was a clunky piece of paper transferred by foot. It's very possible that a modern bond doesn't need to provide investors with the same 2% real coupon that it provided in times past because it provides a compensating return in the form of a higher liquidity yield. [By now, faithful readers of this blog will know that I'm just repeating the same argument I made about equity yields .] Here's a way to think about a bond's liquidity yield. Bonds are not merely impassive stores-of-value, they ...

Here are Paul Krugman and James Hamilton on the renewed demand for dollar bills. So what's behind the soaring demand for US paper dollars? A simple strategy for getting a grasp on US data is to compare it to the equivalent in Canada. Comparisons between Canada and the US serve as ideal natural experiments since both of us have similar customs and geographies. By controlling for a whole range of possible factors we can tease out the defining ones. The chart below shows the demand for Canadian paper dollars and US paper dollars over time. To make visual comparison easier, I've normalized the two series so we start at 10 in 1984. On top of each series I've overlayed an exponential trendline based on the 1984-2006 period. I've zoomed in on 1997 for no other reason than to provide a higher resolution image of the typical shape of cash demand over a year. Some interesting observations: 1. Not a huge surprise, but the demand for US paper has been accelerating far faster than...

The price of gold has fallen over $200 in the last two days. This sounds like 1983 all over again. Not only did Star Wars Episode VI come out in 1983, but gold experienced its largest one-day fall in recorded market history. On February 28, 1983 the metal fell $56, a whopping 11.5%. The context in which this collapse happened is worth revisiting since it might help explain some of what we are seeing now. I'll take a short diversion through 1983 oil markets before getting back to gold. There were plenty of worries of an oil glut leading up to the metal's 1983 collapse. OPEC, which had kept an iron grip on oil prices by adjusting production, had been steadily losing its dominant position as oil producer. In the 1970s the cartel controlled over 60% of world production. Small adjustments to the rate at which it extracted crude were sufficient to set a floor in the oil market. But increased supply in the UK, Norway, USSR, and Mexico had eroded this share to under 40% by the early 19...

Paul Krugman has a recent post in which he casts bitcoin as a retrogression from our current fiat system. He's wrong about this. In the next few years, I put decent odds on the guardian of our fiat system, the Federal Reserve, adopting the very bitcoin technology that Krugman finds so dubious. Here is Krugman: One thing I haven’t seen emphasized, however, is the extent to which the whole concept of having to “mine” Bitcoins by expending real resources amounts to a drastic retrogression — a retrogression that Adam Smith would have scorned. Krugman has taken bitcoin's colourful jargon a bit too literally. It's best to think of "bitcoin" as a distributed ledger, or a record, and not as physical coin. And while Bitcoin miners do "mine", they're not performing a function that is analogous to gold mining. Rather, they're contributing to the tending and maintenance of the information that makes up the bitcoin ledger. The mining community listens for le...

I've learnt enough about the terms income , savings , consumption , investment , capital , and other major macroeconomic categorizations to pass a basic economics exam. But I've never been a big fan of the style of thinking these terms force on me. Am I just being lazy? I'll lay out my points and give an alternative. Squarely Rooted recently commented on the somewhat arbitrary nature of the boundary economists set between consumption and saving, opining that travel should be thought of as investment, not consumption. On twinkies as savings, here is Squarely Rooted from an earlier post : Think of a Twinkie. Twinkies are an odd product; on the one hand, they are a cheap, delicious, unhealthy snack; on the other hand, they are (at least according to legend) practically immortal. So is buying a Twinkie consumption or saving? Does it depend when you eat it? And for those who will say “but Twinkies aren’t an investment, they bear no interest, they just sit there” – so does mone...

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[This is a continuation of my post on liquidity adjusted equity valuation .] If your favorite holding period is forever, then today's stock markets just aren't meant for you. As I pointed out in my previous post on stocks and liquidity, stocks can do more money-ish and cashlike things than in times past. For most people, the ability of stock (or any other good or asset) to be easily-exchanged is desirable since it ensures that come some unforeseen event, that stock can quickly be swapped for more suitable items. We can think of easily-exchangeable stock as insurance against uncertainty. Investors estimate the stream of 'expected comfort' or 'uncertainty alleviation' that a stock's degree of exchangeability will provide, discount these streams into the present, and arrive at some value for the liquidity return provided by a stock. The more moneylike or liquid a stock, the higher its liquidity return . A stock's liquidity return makes up but one bit of a ...

I see that the mainstream bloggers are starting to flog the bitcoin story, which means I'll be moving on to greener blogging pastures for the time being. I've had some great discussions in my last few posts with my commenters. As always, this blog is meant to be learning tool, both for me to absorb things from others and hopefully vice versa. In this post I'm going to discuss the idea of a plunge protection team made up of avid bitcoin collectors that could potentially anchors bitcoin's price and provide a degree of automatic stabilization. In all my bitcoin posts I've been emphasizing that bitcoin lacks a fundamental, or intrinsic, value. Regular commenter Peter Surda disagrees, pointing out that despite their intangibility, virtual goods should not be seen as inferior to so-called real assets. I completely agree with him. 0s and 1s can be valuable. When I bandy around the term fundamental value , I'm not talking about physicality or solidity. What I'm...

A thousand years ago we never needed to measure lengths of more than a few hundred leagues nor less than a few hairs. Now we measure the diameter of our local galactic supercluster in yotameters and the length of neutrinos in yoctometers. A similar dynamic exists in the measurement of prices. When I was doing research last week for this post , I ran into my first instance of something measuring in the quadrillion dollar range. Apparently the Depository Trust & Clearing Corporation (DTCC) settled some $1.669 quadrillion in securities transactions in 2011 . I'm still having problems getting a grasp on the size of that number. I doubt a banker in 1500s London would have ever had to conceive of anything more than a few hundred thousand shillings. When the Fed's balance sheet exploded in 2009, we all had to get used to thinking in terms of trillions of dollars. But anyone analyzing the Fed in, say, the 1960s never had to worry about a balance sheet worth more than a mere $80 bil...