Going Short

Well, that escalated quickly. I had already positioned defensively for 2024, overweight cash in a federal money market paying 5.2% (now 5.3%). I still have positions in SP500 and a high quality dividend fund. When inflation data started feeling sticky again in February/March, I closed out my EDV and TLT positions with small losses. I also sold most of my single stock positions for profits. All proceeds are sitting in the federal money market and I am happy to collect interest on it all year if cuts don't materialize. My older bond ladder goes through 2026. I'll be looking to lock in medium or longer term rates and slowly increasing my stock allocation if and when interest rate policy changes. For now, there is nothing wrong with a pile of cash. The irony of Dollar Death Spiral investing mostly in dollars is not lost on me. Who is that idiot in the mirror?

Going Long

Made some big moves in retirement accounts in the last couple of months. The boldest, and luckiest, was going 100% SP500 in one of my accounts at the end of October. Stocks have had a giddy run since then. Gave me the vapors. In January, I will reallocate that back to a more reasonable mix.

In my other account, I started nibbling on EDV a month ago as the inflation related data started to show real signs of cooling. This week, the Fed all but declared victory by suggesting rate cuts could happen next year. That ignited another boom in all assets. I started to flesh out my bond ladder again in the 2-3 year range with treasury notes, added more EDV, and also picked up some TLT. I expect my bond weighting to be slightly heavier next year compared to 2023.

Corporate bonds have been an anomoly this year. New issues for investment grade bonds are usually at a slight premium over treasuries but that hasn't been the case in a while. Most of the stuff I see from AAA to A is trading at a lower yield than treasuries of the same duration. I still have one corporate issue on my ladder, but it will roll off in 2026. The premium may be back by then.

Juicy Interest Rates Juiced

I pulled the trigger on a 3 year agency yielding 6.000%. I have some other T-bills maturing soon so I might commit a little more in the 2-3 year duration range. Money markets still look great short term until we get a definitive signal from the Fed that the hikes are over. I plan to follow the fattest part of the curve as it eventually moves out. EDV has been slaughtered over the last three years and is near all time lows. It's a riskier play, but could be a nice booster when it is clear the rate environment has changed. That may not be clear until next summer or later.

Juicy Interest Rates are Juicy

Six month T-bills are yielding 5.41% and I can lock in 5.858% on 5 year agencies. Surprisingly, you have to drop down to barely investment grade corporates to get that kind of yield. With inflation coming down at a moderate clip, Fed watchers expect one or two more quarter point hikes before rates settle. These aren't the once in a lifetime yields on treasuries that could be had in the 1980s, but they look pretty darn good compared to stocks that feel a little toppy. I don't plan to change my portfolio allocations much, maybe lean in a little more on the short end as the bottom of the bond ladder matures.

Champion of the Dollar

Dollar Death Spiral was started during the 2008 financial crisis to explore alternatives to fiat currency with an early focus on precious metals. The 2008 crisis exposed mismanagement and abuse by the banking sector and failures to regulate perverse incentives. While enormous damage was done to the global economy during that crisis, the mismanagement looks almost trivial when compared to the crypto ecosystem and the joke term "web3". Crypto has no management, no principles, and no regulation. It's really worse than the wild west because it is actively pernicious.

The ecosystem thrives on theft, lies, money laundering, ponzi schemes, and anything to cheat people out of their valuable fiat money. Ironically, Dollar Death Spiral has become a champion of the dollar and government run fiat money. That doesn't mean there isn't ongoing mismanagement and mistakes in the fiat system. But by comparison, the fiat system is a rock of stability and competency. There is a reason the wildcat banks didn't last and crypto should not last either. It is a much bigger threat and deserves as much derision as I can pour on it.

Long live the Dollar.

Blockchain: Innovation or Illusion

The Market Value of Bitcoin

On June 12, 2022, the crypto lender Celcius Network froze all assets for which it was custodian. On July 13, 2022, it declared Chapter 11 bankruptcy. After another flash crash of crypto, Celcius was left with millions more in liabilities than assets. It couldn't pay back it's customers what was owed. This also broke the Luna synthetic stable coin and it'w own tokens. It was the biggest crypto firm to crash at the time and caused a lot of collateral damage. Bitcoin had already been in a bear market, and after Celcius, traded in a range between $20,000 and $23,000. Down from a high over $64,317 in November, 2021.

It's important to understand that the entire crypto space, and every single firm built around it is unregulated or nearly so. It's wildcat banking. Tulip speculation. Snake oil. Rug pulls. Ponzi schemes. Or, what Warren Buffett calls rat poison. Even Coinbase, the most respected and well run company I am aware of, has a business based on a trash heap of scams.

In November, 2022, we got to witness the massive failure of FTX. FTX was considered the stable rock in crypto-land, having bailed out several companies in the aftermath of Celcius. It was all a facade. Turns out it was being run like Enron with no internal controls and was gambling customer assets with it's sister company Alameda Research. Even though it was an unregulated company based in the Bahamas, the executives involved might be facing criminal charges and there may be a million creditors as part of it's bankruptcy. In the aftermath, bitcoin traded in a range between $16,000 and $17,000. This was a true curiousity to me. How could bitcoin maintain some semblence of liquidity and value after FTX? Were people really paying $16,000 to buy it and keep it propped up? Was institutional money that was torched in FTX still pumping naive fiat into bitcoin?

Then, I had an epiphany. Bitcoin has failed at every level as a currency. It's too slow. It's expensive. It requires a fantastical amount of energy (and growing) simply to maintain it's existence. It's a blight on the world due to climate impact. It's been duplicated (hard forked) more than 20 times. Yes, bitcoins can be copied like you copy/paste text. What defines which fork is the "true" bitcoin is decided by an informal consensus of developers and miners. But, it has a real market value. The rise of bitcoin has enabled a very profitable industry of ransomware, money laundering, and extortion scams. While bitcoin wallets can be tracked after receiving ransomware/extortion payments, or buying bitcoins with dirty money, the crypto can be spun through washing services like Tornado Cash (now under US sanction). The mix of coins coming out the other end of Tornado can be converted back to fiat somewhere in the world and ... profit!

While the instrinsic value of bitcoin turned out to be zero, like the other ten thousand crypto projects so far, there is a market for illegal activity that is more attractive at the moment than using traditional global banks with their own tainted history. If all crypto disappeared tomorrow, money laudering would continue at some level in the banks but under the scrutiny of regulators. And the ransomware problem would be greatly diminished if not eliminated. It wouldn't be an ideal world but it would be an improvement.

A reasonable person could argue that anonymous cash can, and is, used for illegal activity. But, the purpose, the value of fiat cash is not based on ransonware or money laundering. The scale is not even close. Bitcoin has value because crime pays. If, at some point in the future, the cost of laundering money with bitcoins/crypto exceeds the energy cost of minting it, I think it would collapse to it's intrinsic value of zero.

Update: 11/23/2022
The Wall Street Journal came to many of the same conclusions I did in this article...

Traditional finance had little incentive to build connections to crypto because, unlike government bonds or mortgages or commercial loans or even derivatives, crypto played no role in the real economy. It’s largely been shunned as a means of payment except where untraceability is paramount, such as money laundering and ransomware. Much-hyped crypto innovations such as stablecoins and DeFi, a sort of automated exchange, mostly facilitate speculation in crypto rather than useful economic activity.