Tesla too high?

Tesla has had an amazing year, going from about $25 to $150. But, several worries: 1) it doesn't have legal rights to its name in China even though it's trying to sell there 2) gasoline prices are trending down 3) the company loses money on selling cars but makes money on emission credits

The potential of the credits is what drove the stock this year. Tesla makes $millions from selling the credits. http://www.arb.ca.gov/msprog/zevprog/zevcredits/2012zevcredits.htm

A big problem is that Tesla may have gamed the California law to qualify for more credits.

This document describes the law: http://www.arb.ca.gov/msprog/zevprog/zevregs/1962.1_Clean.pdf

A zero-emission vehicle gets 3 credits if it can go over 100 miles and 4 credits for 200 miles without any emissions.

The top vehicle class gets 7 credits if can go 300 miles and refuel in less than 15 minutes. Unfortunately for battery cars, even the fastest recharging takes about an hour. The top class was expected to be hydrogen cars or equivalent.

This is where the story gets tricky...

Tesla had a splashy media demo in summer where they showed a battery swap in a few minutes. Is a "swap" the same as "refueling"? Who knows. Tesla appeared to qualify for ~twice the credits.

Everyone believed the demo and the stock moved higher on anticipation of the extra credits.

I'm doubtful that an automated system could safely could replace a critical piece of the car in an Indy-car-like pit-stop.

Months later -- the Tesla SuperCharger network still isn't ready and the company has not built the battery swap facilities.

This is raising a big red flag for the stock. The company appears golden if you believe the media but the numbers are looking questionable.

End of era of aircraft carriers?

Are aircraft carriers becoming obsolete?

The new Jerry Ford carrier just launched. Aircraft carriers supplanted destroyers a generation ago because carriers had airplanes that could fly farther than the big guns on destroyers could lob a shell. Destroyers could hit targets up to a few miles away. Aircraft carriers could reach 50X farther with better accuracy and cause more damage.

My guess is that the next generation will be missile carriers. Instead of one ship with dozens of planes, the new missile carriers will have 100s of missiles that launch faster and covers more territory than planes launched from an aircraft carrier.

My expectation is that the current Ford class carriers will be the end of the line. The will still be used for decades but the ships that replace aircraft carriers will be quite different. Instead of a floating city of 1,000s of sailors, the next navy will have aircraft carriers for reconnaissance drones and electronics planes, not loaded with fighter planes. A strike force will be several missile carriers and several aircraft carriers as a coordinated group instead of one huge aircraft carrier (and dozens of support ships).

Economic generations

Economics change its central beliefs about every 30-50 years. I guess that is the length of a generation of economists who start with the standard thinking and then are replaced by the next generation who have a new standard.

Two generations ago (~1900-1930s): Economists used Victorian thinking and followed classical theories about human behavior. Rigid, predictable models. Sociological and historical theories formed the basis of economic thinking. People were driven by "animal spirits".

One generation ago (~1950-1970s): Lots of math and physics influenced the models. Some results seemed bizarre from everyday assumptions. Statistical models of crowds drove economic thinking. "Aggregate demand" was measured and predicted.

Now (~1990-?) Models of randomness and risk are now getting more attention. Instead of Guassian probabilities, the new theories refer to Levy processes and Doob's martindale. This is like quantum physics instead of Newtonian. Models look at game theory and probabilistic outcomes.

Next generation? Who knows. Maybe machine learning combined with behavioral economics will drive new theories where people are not 100% rational agents that decide based on marginal utility.

2014 pivot to Asia?

Will the emphasis be on Asia in 2014? I expect the Obama admin will soon talk up a "pivot" in foreign policy that focuses on Asia.

The recent Iran agreement was, on its face, a horrible deal for the US. The Afghan deal was another bad deal for the US. Why? Is this incompetence or a strategy change?

The only positive conclusion I reach is that the US is washing its hands of everything in the Middle East in preparation for looking elsewhere. Probably towards Asian countries.

Maybe the success of fracking means that Middle East oil isn't as crucial as it was even a few years ago. Maybe they now realize that the problems are intractable. Maybe domestic politics has changed (the pro-Israel bloc was frustrated by Clinton so they became the neo-cons)

If this view of a foreign policy shift is true, then Israel's position is weakened if the US views the region as non-primary.

Lots of investing ramifications...

Deflation?

After trillions of dollars/yen/euros over the past decades, is the next risk from deflation?

In Europe, inflation has been below expectation. Latest measurement is 0.7% that's below last year's 1.1%.

In Japan, the result of Abe-nomics is still unclear but Japan has had weak GDP growth for two decades while experiencing slight deflation.

In the US, the Fed has been targeting 2% inflation and inflation has been about that level. However, the latest number was below the target. The November 2013 Consumer Price Index for Urban Consumers (CPI-U) showed an annual inflation rate of under 1%. Something to fear?

The enormous progression of computing power has been endlessly reported. But how does it affect cloud computing? An amazing statistic was given in an article about IBM's Watson project.

“It’s now $90 an hour to rent 10,000 computers.”

As the 50th anniversary of JFK's assassination approaches, the media is re-telling conspiracy theories and urban myths. What does this relate to markets? For investing, the assumption has been that humans are rational thinkers that assess the worth and utility of their purchases. But that assumption is being pushed aside by the field of behavioral economics. People are not lacking in biases, prejudices, and faulty thinking. I may turn out that a better assumption is that people are story-tellers. Given facts without a narrative, people will construct a story to bind the facts. Some stories are good; many are not. For investing, stories are everywhere and influence market decisions.

The old rumor that Anhuser-Busch-Inbev wants to by SAB-Miller has returned. This rumor has been circulating for a couple years and it had quieted last year when SAB-Miller bought the Mexican brewer, Grupo. Now the rumor returns. There's a deeper historical component that makes the story more than just the monopolistic domination of a market sector. Does this tell a sudsy story of the end of Western dominance? Inbev has its origin centuries ago in Belgium. It acquired European brewers as that region declined in power. Then it jumped the Atlantic to buy brewers in the Americas as growth slowed here. For the past decades, the real growth story in beer has been Asia. Snow Brewing in China has become a huge competitor. SAB-Miller has a market cap of about $80B. So after a premium, AB-Inbev would end up paying close to $100B to acquire it. http://business.financialpost.com/2013/10/28/massive-merger-expected-between-anheuser-busch-and-sabmiller/

What's happening with the US housing market? After the government pushed the housing bubble through regulations and Fannie Mae/Freddie Mac, the subprime crash in 2007-8 has collapsed the entire housing market. During the inflation phase of the bubble, homeowners used home-equity loans to withdraw money from their home to spend in other areas. Now with many mortgages "below water" that line of easy credit is much reduced. After the big wave of foreclosures pushed down prices, investors have been buying homes. One trend has been all-cash purchases. For example, all-cash purchases reached over half of transactions in regions that were housing bubble hot spots, like Las Vegas. I expect the housing market will remain weak for years due to tighter lending standards and changing demographics. The US's housing market will decrease from the high levels of home ownership reached in the mid-2000s and renting will be more common.

What is the future of money? Money developed for multiple needs. The dominant explanation is that money developed for trading when bartering wasn't sufficient. But another big boost was so that governments could more easily collect taxes. As governments grew so too did financial companies. Their symbiotic arrangement is clear around the world. With the current model of money as controlled by governments, money has become a global market as trade spread. Modern money is a high speed commodity in a global financial marketplace. Money spans the centralized markets of individual countries to form a network of international markets. What's next? Will money switch to a distributed model if money becomes electronic? Imagine a world where bitcoins are the preferred currency for purchasing. How will governments tax? Will national tax laws survive in a world where the money isn't controlled by a nation? Will national debts be supported if nobody wants national currencis?

Evolution of societal organizations

How does a society organize?

A societal grouping may be disorganized. Such random groupings arise as crowds in busy areas. A crowd behaves like a "gas" composed of individual that react to events. Some emergent patterns can develop from the autonomous behavior of each individual.

Structured organizations are:

family -- the start of kin organizations pre-date history
hierarchical -- developed 1000s of years ago and used in religions, military, and government
corporate -- developed 100s of years ago and used for businesses
market -- developed 100s of years ago and used for consumers
network -- developing now?

Family structure may have been one reason why humans evolved big brains. The evolutionary advantages are large for knowing and remembering the many inter-personal relationships of a village. Instead of treating other members the same, if a person knows the other person, then both might benefit more than would occur in anonymous interactions.

The transition from "family" to "hierarchical" is thought to be due to the need to organize large militaries.

A "market" is very useful for price discovery and dealing with large numbers of buyers and sellers.

Is the internet producing a new societal organization, the "network"? People build networks of relationships that transcend other organizations. Could this be the result of an electronic society?

International reply coupons

Most investors have heard about "Ponzi schemes". These are the name for investment scams where promises are made and new investors' money is used to pay old investors. Eventually, the scheme collapses when new money slows. Surprisingly, the basis for Ponzi's scheme still exists. Ponzi bought IRCs (international reply coupons) in low-cost countries and sold them in high-cost countries. It's a valid arbitrage. IRCs can be exchanged at post offices for international postage. http://www.upu.int/en/activities/international-reply-coupons/about-irc.html Unfortunately for Ponzi's victims, while buying and selling IRCs could theoretically be profitable, there were several problems. First, the market for IRCs is small. After all, making only a few cents per IRC requires many millions to be traded before a large firm gets profitable. Second, in addition to the overhead of buying and selling coupons there is a large cost to shipping and handling all those coupons. Finally, the biggest problem was that Ponzi was an outright crook. He wasn't really buying the IRCs, he only took in investor's money and claimed he was trading IRCs.

Comparing advertising and economics is revealing. Both attempt to understand how people make economic decisions. From their origins over a century ago, they assumed people make rational decisions based on information. Early advertisements were loaded with information about the product. However, advertisers found that people aren't completely rational and other things besides information motivates purchases. For example, soft drinks are sold on emotion, not nutrition. Economists simplify consumers as rational consumers that seek to optimize decisions on utility. However, economists are moving beyond that simplistic view based on insights from studies of behavioral economics.

What caused the US housing crisis? The likely answer is: many factors contributed. In the US, the federal government backs the majority of home mortgages. So its effect is large. Another factor is the Federal Reserve's actions on interest rates. Another factor was the rise in oil prices. And other factors like demographics, job trends, and foreign trade were partial causes.

The direct effect of Fannie Mac and Freddie Mac was large in expanding then collapsing the sub-prime market. This graph from the NYTimes shows how their accounting scandals in mid-2000s greatly diminished mortgage backing.

Fannie and Freddie both had multi-billion-dollar accounting scandals. Franklin Raines was CEO of Fannie Mae from 1998 to his ouster in 2004. The Clinton-appointee later paid a fine of nearly $25million. When Fannie and Freddie slowed backing mortgages, the sub-prime sector rapidly deteriorated because buyers could not get loans to purchase homes that previous sub-prime buyers now wanted to sell. The pyramid quickly crumbled.

I'm still confused about oil prices. Why has it jumped up in the past month? In oil commodity trader lingo, oil is in a massive backwardation. The near month contract is priced about $108/bbl but the July 2014 contract is $95/bbl. Normally, commodity markets are in "contango" where current prices are lower than next year's prices. Contango happens because the commodity has to be stored, plus there's always the unknowns that increase prices next year. Oil should have contango because its storage costs are higher than, say, metals or grains. But ... oil is acting very strange. The current spread between now and July2014 is $13, a record. (Although it's not a record if viewed as a percentage) My guess is that the traders had models of the oil inventory at Cushing, OK. But the recent reversal of a pipeline is sending crude to the Gulf but the Keystone-XL pipeline might never deliver oil to Cushing tanks. After 3 weeks of draw downs at Cushing is triggering the traders models to expect higher oil prices. My conclusion -- oil prices are at/near a high peak and are heading lower by fall.

Economics of beer

Beer is shaped by political and economic forces. Historically, what has been a typical beer varies across societies. At its basic level, beer is fermented grain. But on a practical level, how a beer is made is subject to many variables. While some styles of beers depend on technology like modern light lagers depends on carefully controlled malting and powerful chilling, other styles were developed or influenced from tax laws or government policies.

For example, the Belgian Wit beer was created partly from how its production was taxed. Taxes were calculated from the amount of malted grain so thrifty brewers used some un-malted grain to save money.

Many countries tax beer by alcohol level. Germany has tax brackets that define beer. Einfachbiers (translated "simple beers") have an alcohol level of about 1%. Similarly, schankbiers have an alcohol level of 0.5 - 2.6%. Very few beers fall into this category. Many more beers are vollbiers (translated "full beers") with between 3 and 5.3% alcohol. Finally, starkbiers (translated "strong beers") have alcohol level over 5%.

A common myth is that IPAs (Indian Pale Ales) were made hoppier and more alcoholic to survive a long sea voyage. That explanation is unlikely to be the reason. Instead, IPAs were likely based on a style of beers, called October beers, that were brewed for aging. Other styles of beer, some much lighter, were also exported to India. What seems to be the reason that IPAs became established was that England taxed exported beers differently than domestic beers. Beers were taxed by their quantity of grain, except if the beer was exported. At the beginning all beers were of similar strength but exported beers remained at that level while domestic beers gradually weakened as taxes rose.

Hollywood is hurting

Hollywood is losing its (fake) golden glow.

Steven Spielberg is predicting an "implosion" in the business model for Hollywood.

Like the venture capital business model for new tech companies, Hollywood makes its money from a few blockbusters that also cover the losses of the non-winners. Hollywood gets its revenue from ticket sales, movie rentals, merchandising, and other smaller sources. But movie rentals have plummeted and DVD sales are lower so trying to run Tinsel Town on just ticket sales is hard.

What to do? Currently Hollywood opens a new movie in thousands of theaters for a few weeks at about $10 per ticket. Should Hollywood change its ticketing model to be more like music concerts and poperas -- charge higher prices and have longer runs? Should Hollywood try movies over the web?

Pathological Altruism

A social science idea that recently emerged is "pathological altruism". Lecture video

Basically pathological altruism is the idea that somebody does something because they think it helps but it really hurts. An example is giving a child a piece of candy. It seems like good thing to do but what happens if a hundred people give that child candy? Another example: feeding a wild animal so that the animal returns for another easy meal and becomes a threat.

Of course, the problem extends beyond single individuals. Groups or entire classes can be hurt by actions that seem good on the surface. A free lunch is never free.

For investments, pathological altruism may lead to bubbles and other mis-investments. If the thinking is that everyone would be helped by going to college or owning a house, the result is that colleges and homes becomes expensive, then subsidized and then very expensive. A classic bubble is formed. The Fannie Mae and Freddie Mac loans promoted housing loans for those unable to meet prevailing lending standards. As a result many of those who got the loans ended up losing their home, money, and wrecking their credit rating. The idea of "pathological altruism" is that bad consequences do happen and can be foreseen.

Japan's debt

I'm starting to think that Japan will be the trigger of the next financial crisis.

Japan's public perception is a strong economy that showed it could innovate and dominate. Is that still true?
My belief is that Japan is much more driven by demographics than any inherent societal advantage. Japan had a huge population boom after WW2. The nation was encouraging its citizens to emigrate in the 1960s and 1970s. In the 1980s and 1990s, Japan's population was in its most productive years. The pressure for housing caused a huge boom in real estate.

Now, after 2 decades of no growth, Japan has a population that is increasingly tilted towards people over 65 that are retiring and not buying. Bank of Japan's view The scary amount of national debt owed by the government -- over a quadrillion yen is twice the size of the country’s economy. Japan's debt clock

Japan's debt service now accounts for nearly half of government revenue, up from about 4% in the early 1970s. More than half of public spending is financed by new debt issues. As a result, the government borrows heavily just to service debt. How can Japan ever get above water?
In Japan the birthrate is low and there’s little immigration. Japan is actually shrinking by a million people each year. If interest rates climb, Japan's government will have to pay ever higher amounts to service its debt. Eventually it won't be able to.

Nicaragua canal

A century after the Panama Canal was finished, a new canal across Central America might be dug. Nicaragua is getting ready to explore building a canal that would be able to handle bigger ships. If this new canal goes ahead, it would transform Nicaragua with construction jobs for a decade and then fees from ships using the canal. The first step is planning the project and choosing a route.

Japanese pop group

There have been many stock market analysts that look at the general economy for hints. In Japan, a girl pop band is doing the reverse. The band looks at the Nikkei index for how to perform. The pop group is called Machikado Keiki Japan; roughly translated as: Economic Conditions in Japan. http://www.japantimes.co.jp/news/2013/05/03/national/girl-group-bases-style-on-nikkei-ups-and-downs/#.UbQLd84zeCh

Misled by models III

To continue the series on why it's a bad idea to blindly follow simple models of complex situation, Dr. Roy Spencer has compared the output of 73 climate models to actual recent temperature measurements.

 The following image shows how the models compared to actual measurements:

Tesla

Tesla's stock has zoomed to over $100.

It has a P/E over 100 and looks way over bought. Is that price sustainable? Will it drop?

I think the stock's bubble might pop soon.

As far as I can determine, Tesla loses over $10K per car sale but it is only making money on selling carbon credits to other car makers under California’s "Zero Emission Vehicle" law.
http://www.bloomberg.com/news/2013-05-13/tesla-profit-aided-by-sales-of-california-u-s-emission-credits.html

BTW. Tesla's cars actually emit as much CO2 as other cars, although not at the car's tailpipe. 
http://seekingalpha.com/article/1418421-is-the-tesla-model-s-green
http://www.teslamotors.com/forum/forums/reduced-carbon-footprint

That article calculates it produces more CO2 than a regular BMW 535 or a Porsche 911  if all factors are fully analyzed.

Tesla lost $91M on selling cars, but, gained $103M ($68M + $17M + $11M + 7M) in government credits and one-time gains.

http://www.greencarreports.com/news/1084403_tesla-didnt-make-a-profit-on-its-cars-in-q1-lets-be-clear

The stock has had huge gains the past few months.
http://finance.yahoo.com/q/ta?s=TSLA+Basic+Tech.+Analysis&t=6m

Tesla's market cap is about 1/4th GM's even though Tesla's
monthly sales of 1,200-1,500 are about what GM sells in 1 day.

Another way to look at it -- Tesla's market cap equates to about $7M per car sold per month.

I think traders are realizing that Tesla may have saturated its market niche so growth will flatten.

TSLA dropped 5% today even though the general market was up.
One reason, besides the reaction to its extreme price, is that the plan for a chain of recharging stations will be expensive to build.  Each "Supercharger" station will cost $300K to build.  And then there is the additional costs for the property, operational expenses like salaries and insurance, and the cost of powering the recharging.

Solar is getting very attractive.

Germany has spent a lot of money on subsidies
for solar on political reasons, not economic ones.

A smarter location is Australia where photovoltaic
installations are very competitive with existing sources.

In the US, solar will likely take off in a few years if
the current price/performance graph continues.

In contrast, wind generators will continue to be only
marginal if they can't improve on price or reliability.

One aspect of energy generation that doesn't get

much notice is nuclear.  In the US and Europe it

has a bad reputation but in China, Russia, and India

it's growing.

An investment in uranium mining is looking attractive.
This year the "Megatons to Megawatts" program expires.  This was

the agreement to use uranium from old USSR weapons

in civilian reactors.  New uranium sales will probably be

at higher prices.

Plus this week an Al Qaeda group attacked a uranium mine
in northern Africa and production might be affected.

Wealth Effect

One driver of the world's stock market is

called the "wealth effect" where the Fed prints
lots of money and and pushes down interest rates.

The expected result is that investors will change
their choice by making more investments in risky

stocks and less in safer bonds.

The hope is that this change in investments will

stimulate the economy. At least that's the theory.

While stocks have gone up from the Fed's QEs

and Japan's cash injections, has the stimulation

happened?  Hard to tell.  Lots of the extra money is

being held by banks instead of being lent out. Plus
a lot of the stock gains hasn't escaped the stock
markets as traders have mainly bought not sold.

By the way, the political slogan of "trickle down"

sounds related.  That slogan was popularized by

a speechwriter of FDR against the theory of that

era that urged high-paying jobs instead of many

low-paying jobs.  Now some mouth off on being

anti trickle down but for "living wage"...

Knights and bank II

[NOTE: This is the second part at looking at how organizations of knights affected banking.]

In the first part, the Templar Knights had lent to the French king and then were exterminated by the king after a political battle.  France's King Phillip also forced the Catholic church to end the Templar order.

Any resources of the Templars that were not taken by France were absorbed by other orders of knights, principally the Hospitaller Knights.

Templar Knights had produced many innovations in banking -- secure accounts, a type of travelers check, safe deposit boxes, and structured large loans.

With the end of the Templars, the Hospitallers soon gave up banking too because they feared the same outcome would hit their order.

This meant the field of banking was opened for new lenders to use the Templar's innovations.  Pawn shops met the needs of small borrowers but governments needed bigger lenders.

Many of the large lenders didn't require interest payments on the loans because usury was still viewed as anti-religious.  Instead the lenders requested extra "conditional" payments on the loan.  Banks would receive rent payments, or ownership of crops, or direct reception of taxes.  For example, the kingdom of Naples that controlled the southern half of modern Italy was completely run by banks.

As the banks run by orders of Knights stopped, family-run banks grew.  These family dynasties grew quickly.  Italian cities became known for their banks. Florence banks dominated international finance and the gold florin coin was widely used. By the 1300s two Florence families, the Bardi and Peruzzi families, grew amazingly wealthy from their banking businesses.

In England, King Edward III ran up big debts from these Italian banks to fund a war against France. When the king was unable to repay the loans, the king defaulted on the loans in 1342 and the Bardi and Peruzzi houses went bankrupt.

Those bankruptcies caused a massive economic depression that probably ranks as the worst ever in human history.

Misled by models II

Many financial models use a Guassian model for characterizing risk.  This model is a normal distribution of movements.

It is used in Modern Portfolio Theory, Efficient Market Hypothesis, and other “random walk” models of investments.

Why use Guassian bell curve?  Because it is well-understood, simple, and works well for the average case.

But the model breaks down outside of typical days.  The phase "black swan" popularized this known problem of mis-matched volatility.

How much mismatch?

• In the past century of the Dow-Jones Index, the model would predict a few dozen days of +/- 3.4% changes.  In reality, about 1,000 days had moves that large.
• For bigger moves of +/- 4.5%, instead of the 10 or so predicted days there were several hundred.
• For even bigger moves of +/- 7% where less than one was expected, in reality there nearly 50.

Clearly it is not a good strategy to blindly follow the simple model.

Bloodlines and banks

Dan Brown has a new book.  His previous book
"The Da Vinci Code" was a huge best-seller.
Brown's books are written using semi-historical
backdrops for his cliffhanger stories.

His "holy bloodline" plot-line has a FVN-related
real banking story --

The Bible has a passage that discourages lending
money with usury or interest to "your brother".
http://www.tentmaker.org/lists/UsuryScriptureList.html

But, people still want to borrow money occasionally.
So, of course, there was hair-splitting on the
definition of "your brother".  Somebody in your
family? In your community?  Hard to draw a line.
Eventually, it was settled as "in your religion".
So Christians couldn't lend to another Christian.

But ... that pushed the question to 'what is a loan?'.

As a result, pawn shops and lombard banks thrived.
http://en.wikipedia.org/wiki/Lombard_banking

Lombards were a German tribe that conquered Italy

about 600AD and, being non-Christian, could lend.

In France, about the time of the First Crusade in 1099,
the Jews were thrown out. After losing the Jewish-run

pawn shops, the Catholic Church set up Templar Houses
which were run by the Knights Templar.

Templar Houses expanded beyond loans to individuals

and made big loans to governments.

Governments of that era are like current ones and

quickly over-spent themselves into huge debt levels.

This is where the Dan Brown holy bloodline comes in.

The French King was deeply in debt to the Knights

Templar and was pushing for control over it. In response

the Templars claimed it found a blood line connection

from Jesus to a rival family of the French King. That

seemed to trump the "divine rite" claim of the king.

Game over, right?

In response the French king killed all the Templars...

Misled by models

A lot of the recent economic problems were due to believing models.  In his  "Black Swan" book, Nassim Taleb notes that investors are misled by models of risk.

Predicting weather patterns using models is still far from trustworthy.  Here is the prediction for March 2013 versus reality.  The prediction was made only a few weeks beforehand.

Cupcakes crumble

It's the end of the cupcake bubble!  Oh nooos!!

A few years ago, cupcake shops were hot.  They rode on the wave of rapid growth. From a few cupcake bakeries in New York City, the trend spread to other cities and even had a show or two on cooking television channels.

In 2011, Crumbs stock started trading on NYSE. Its market cap exceeded $65 million when the stock traded over $13/share.

Now in 2013, the stock has dropped 90%.
http://finance.yahoo.com/q/ta?s=CRMB+Basic+Tech.+Analysis&t=2y

Wall Street Journal has an article on the cupcake crumble:
http://online.wsj.com/article/SB10001424127887324345804578425291917117814.html

What's next for Bitcoins?

Their price zoomed up from about $15 at the start of 2013 to over $250 in April.

I think that in a year, Bitcoins will be viewed as an innovation on the path to a digital payment system. However, other systems will surpass it.

Like Napster was an early way to get digital music but it was quickly exceeded by competing services, Bitcoin showed the possibility of digital payments that didn't require interchange costs.

Early digital currencies have tried out various exchanges or small economies. Outside of tightly controlled virtual economies like those used in games or limited to single websites like Facebook, digital currencies have failed.

Even earlier were social currencies based on tightly linked money changers.
(http://en.wikipedia.org/wiki/Hawala)

Bitcoins are the first decentralized electronic currency that achieved popularity.  Bitcoin used cryptology techniques to expand its money base but not for secrecy of users or transactions.  Basically Bitcoin is a distributed accounting system that supports signed transactions. Payment networks are an old idea but Bitcoins used the idea of peer-to-peer networks.  Its "block chain" (http://blockchain.info/) data is exchanged so that servers see the transactions.

A next-gen digital currency system to watch is Ripple.

Here's a history puzzle -- why did economies

starting growing at compounding rates?

Before about 1700-1750, economies had short

spurts of growth but didn't continuously grow.

As a result, the average person lived about the

same in 1700 as they did in Roman times.

So 2 millenia of flat economes.

But after 1750, economies grew year by year.
Compounded growth at even 1% will result in
huge gains after a century or two.

I'm really perplexed why this happened.

Was it due to:

- development of corporations?

- better transportation? Sea-faring?

- societal views of money and debt?

- coffee houses (that encouraged trade)?

- stock exchanges?

- energy from coal mines?

- all of the above?

I'm stumped but it looks like the origin

of the change began in the Netherlands.

Whatever the reason, it's power caused the

rise in power of Europe then the USA.

Economic myths

As I read mainstream economic news

stories, I see a few myths that are

repeated without any evidence.

Here's a few:

1) housing recovery is robust

Nope, the market is bouncing off the

bottom without any robust growth.

Average resale price has climbed 6%

last year mainly because fewer houses

were foreclosed.  And the slowdown in

floreclosures was the legal mess caused

by Fannie/Freddie promoting paper-less

mortgage trading and judges requiring

paper documents.
http://www.reuters.com/article/interactive/idUSBRE92Q0M420130327?view=small&type=gc03

2) the Fed is printing too much money

Nope, they injected lots of liquidity back

in 2009 but the money printing has been

relatively slow since then.  Plus velocity
of money has been slowing.
http://jessescrossroadscafe.blogspot.com/2013/03/the-fed-is-printing-money-but-where-is.html

3) companies are sitting on lots of cash

Nope, while the amount of cash is higher

it is not really out of historical ranges when

compared to overall corporate valuations

or debt levels.
http://www.financialsense.com/contributors/neeraj-chaudhary/2011/12/15/the-corporate-cash-myth

Cyprus natural gas

Digging a bit into the Cyprus mess, I think the

key is natural gas.

Cyprus got into trouble by joining the EU, accepting

foreign accounts from Russia when had it had its currency

problems, and then investing the money in Greece.

All three mistakes probably seemed like good ideas

at the time but, as a group, they were dumb.

Now Cyprus needs a bailout of about $10B to cover

the bank losses.  Does it have enough assets?

However ... looking at its natural gas fields, it does

have the possibility of plenty of assets.

So far, the lease held by Noble Energy (NBL) looks like

it has about 5-8 trillion cubic feet of natural gas.

Plus several more areas are under exploration that

could contain 20-30 trillion cubic feet.  Or more.

At current prices, those reserves would be worth

at least 10X its debt.

Sooo, Cyprus could sell its family jewels to cover its

debts.  The question is who will buy it?  Russia

currently makes a lot of money selling nat gas to

Europe and wouldn't like the competition if another

country sells nat gas.  That's why Gazprom wanted

to lease the gas fields but its low-ball offer was

rejected.  Maybe somebody else will jump in.

Is the EU fixed?  Over the past two years, fears grew that the EU was unrecoverable.  However, the sentiment change in late 2012 that the EU would muddle through.

Now in 2013 there is evidence that the twin bulwarks, Germany and France, are not as strong as hoped.  Both nations have economies that are flat or even declining.  Without growth from those two, what will counter-balance the weakness of Greece, Italy, and Spain?