Remember when Goldman Sachs were the ‘Masters of the Universe’? Their cult carried so far that the Twitter account @goldmansachselevator had over a million followers. It purported to post overheard conversations in the elevators of the investment bank. It was all part of the mystique. It was great and it was funny:

Most people don’t understand that God cast them as extras in this movie. Handshakes and tie knots. I don’t have time for someone who can’t master the basic skills.

Let’s be honest. There’s no way your guess is as good as mine.

I never give money to homeless people. I can’t reward failure in good conscience.

Most people wouldn’t even be the main character in a movie about their own lives.

Goldman went public in 1999, it was the beginning of the end of the bank in its greatest form. Further strife lay ahead in 2008 when they were effectively bailed out by the US Government, thanks to some favours from former CEO Hank Paulson.

Anyway, they are still alive and kicking but the world’s top graduates haven’t queued around the block to work there for at least 15 years. They started going to Google, then Amazon, now they don’t even bother going to university. This week Goldman gave a stodgy presentation on bitcoin from a department known as the “Investment Strategy Group”. One former Goldman trader described the group as a “graveyard” and “not known for their deep analysis”. They aren’t known for their grammar either, since every word on the slide has a capital letter.

Personally though, I’m all for negative analysis I don’t want to hear about why bitcoin is great and what features it has etc etc. I know that story very well. We want to know why it might fail, what are the weaknesses it must overcome? This stuff is the best because you can actually make a judgement against what is a very negative analysis from Goldman.

Looking at each point in turn:

• Does not generate cash flow:
  • Entirely true, by design.
  • The comparator group they use, bonds, are in a 35 year bull run. Yields are at all time lows. I hardly think getting no cash on bitcoin is worse than getting negative yields on a bond.
• Does not provide earnings through exposure to economic growth:
  • True. No direct earnings and no cost base either. So does not benefit from earnings but cannot go bankrupt either.
  • Other things being equal though, bitcoin’s value would grow with the economy since it is really a relative pricing mechanism.
  • Over time, bitcoin becomes more scarce than almost everything else.
  • In particular it benefits from “false growth” that is generated only through the printing of money.
• Does not provide consistent diversification because correlations are unstable:
  • True.
  • It has simply outperformed every asset class on earth since launch. It’s not really correlated with anything for that reason.
  • Given the time series of bitcoin is so short, this really is a non-point.
• Volatility:
  • True.
  • Lost 37% in one day in March this year, also true.
  • Outperforming the S&P 500, Nasdaq, Gold and almost anything else this year, also true.
• Does not show evidence of hedging inflation:
  • Really?
  • They were $8 in 2013.
  • They are $9,500 now, I suppose that’s not a hedge since inflation has been “low” in that period. I Imagine the answer would be yes if bitcoin were now $20.
• “We believe a security whose appreciation is primarily dependent on whether someone will pay a higher price for it is not a suitable investment for a clients”:
  • Are they recommending we buy things that are plentiful and go down in value?
  • Profit in all assets depends on someone wanting to pay a higher price. The trick is analysing why they might pay that price.
  • Bitcoins are scarce and that scarcity increases with time, so people will pay more for them. It’s no harder than that.
• We believe that while hedge funds may find trading cryptocurrencies appealing because of their high volatility, that allure does not constitute a viable investment rationale
  • True, they are volatile.
  • True don’t ‘day trade’ cryptocurrency, because you will lose to hedge fund robots
  • Otherwise as long as they are volatile and rising what is the issue

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Its been a while since Deutsche Bank did anything exciting other than nearly go bust. They remain on life support and eventually the German State will take them over. This week they did do something useful though, their chart about interest rates is fascinating. For nearly 20 years now professional forecasters have been indicating higher rates for 10 year bonds. The dotted lines are the forecast, the solid lines are the outcome.

Now, with rates close to zero, forecasters are forecasting higher once again. If you look closely at the chart, the forecasters have been very often right, while being totally wrong on the longer scale. That is the message of the chart, most analysts are buried in this quarter, next quarter or some other near term marker. Jeff Bezos said of Amazon’s quarterly results “I don’t pay attention to them, they are mostly the result of decisions we took three years ago”.

The better predictions are probably the ones which set out where we are going long term:

– things will be more digital, in an inconceivably huge way.
– there is too much debt and governments will print more money
– the inequality issue is likely to result in wealth and property taxes
– bonds will be so plentiful they will be worth less
– interest rates may well continue to fall in the short term because central banks and governments have no option but to keep them there

Who cares really about next year? The prize is 10 and 20 years. It’s obvious where this is all going but not as obvious what to do about it.

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I wrote some weeks back about the scale of the Australian spending on what is known as JobKeeper. It was scheduled to cost $130 billion for the duration of the scheme. Well, it turns out that there was an error in the spreadsheet and the scheme is actually costing half of that. The specific explanation was as follows:

“Treasury was wrong because the epidemiological theoretical models were wrong in projecting a potential 50,000 to 150,000 virus deaths and that daily demand for intensive care beds could hit 5000, 17,000 or 35,000, depending on social distancing restrictions.”

In poker there is a notion of being pot committed. It happens when you’ve invested so much money in a hand, that even with the odds against you, you keep betting. The correct thing to do is stop, the odds are the odds and you should just play those odds. Almost nobody is that disciplined though, certainly not governments and just when you thought you’d saved $60 billion dollars, up pops a pot committed government minister:

“…. the government is willing to extend JobKeeper payments after thousands of Australians were left out of work due to the coronavirus pandemic.”

This was all backed up by the Reserve Bank Governor, who said:

“If the economy’s not recovered reasonably well by then, as part of that review, we should be looking at perhaps the extension of that scheme or the modification in some way”

Pot committed, you see. We were willing to spend $130bn, we only spent $60bn, we didn’t get the result we wanted, bet more.

The problem is of course, as the governor points out, the music will eventually stop unless the can is kicked down the road forever. It might be and that would be universal basic income.

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