Bitcoin Under-Owned?

As we discussed in the last article, institutional investors said Bitcoin was the most overvalued security in the world. Since my last post, the price of Bitcoin has fallen below $4,000. Some of the speculation has left the market. The chart below gives you an additional way to look at Bitcoin. It compares Bitcoin’s market cap to the total U.S. mutual funds and ETF assets under management. This is an end-around to get to the asset allocation. Since the only ETF which lets you buy Bitcoin is the Bitcoin Investment Trust which sells Bitcoin at a premium, I doubt that number is accurate. Bitcoin is taking in money from speculators. Those who do venture deals and invest in startups are the people investing in Bitcoin. Cryptocurrencies take in money from young investors just like how the 1990s tech stocks had young investors.

While this chart isn’t perfectly accurate, it does make the argument that many hedge fund managers wouldn’t take the plunge into Bitcoin because it’s too volatile look foolish. Obviously, many people with capital have invested in Bitcoin. That’s how it got to $5,000. Looking at Bitcoin as a percentage of the assets under management is like how gold investors determine if the yellow metal is under owned or over owned. Bitcoin has an advantage over gold in that it’s being used to transact. It has a function which encourages more people to buy it. The hope is that with the expanding price garnering attention, more people will learn about it and use it to buy goods and services online.

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New iPhone X Is Released

The new iPhone devices were unveiled on Tuesday, dominating the headlines. As expected, Apple released 3 new models, the iPhone 8/8 Plus and the iPhone X. Some investors were disappointed with the delayed launch of the iPhone X, which can be pre-ordered on October 27th and bought on November 3rd, but that isn’t an issue in my opinion. It’s still going to be available for the Christmas sales rush. As we discussed before the release of the devices, the key push for Apple is going to be differentiating the iPhone X from the iPhone 8/8 Plus to upsell as many people as possible. Apple did this by bringing the infinity display only to the iPhone X. The iPhone X also has face recognition instead of a finger print scanner. This is going to get Apple fans to pay the $999 that the iPhone X costs instead of the $699/$799 that the iPhone 8/8 Plus cost. The risk Apple is taking is that the middle range Android phones, now have superior screens to the iPhone 8/8 Plus. The Samsung Galaxy S8 has an infinity display and costs $100 less. That might be a problem for Apple. It will hurt market share, but help profitability. Samsung’s Galaxy S8 is a great device, but it’s too good in the sense that it prevents people from buying the Note 8.

Hurricane Irma Packed A Strong Punch

Hurricane Irma had a major impact on the southeast as it caused about 5 million people to lose power; it was the largest power outage in Florida ever. Some parts of Florida won’t get power back until September 22nd. According to FEMA, 25% of houses in the Florida Keys were destroyed. The productivity lost and the businesses destroyed will have a big impact on the economy and Q3 GDP. The damage is still being reviewed as some parts of the Florida Keys haven’t been gotten to yet. As you can see from the chart below, even without Irma included, the hurricane season was rough as hurricane Harvey caused the second most damage as a percent of GDP ever. I expect GDP growth to have a 1 handle when it comes out in a few weeks. The Federal Reserve tracking forecasts are about to plummet.

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Fed Unwind Effects

As we will discuss in greater detail after the September 20th Fed meeting, the Fed’s unwind will soon start to have effects on the markets. The chart below does a great job at giving you an estimate of how the changes will affect the 10-year bond yield. As you can see, at the height of QE the 10 year treasury yield was pushed down over 120 basis points. As of right before the unwind, the yield has been pushed down about 80 basis points according to the Goldman Sachs approximation. By 2020, the effect will be reduced by about 40 basis points more. Keep in mind, that this isn’t a prediction. If market dynamics change, then the yield can sway from this change. For example, the 10 year bond has rallied in the past 6 months even though the reverse effects of QE should be pushing yields up.

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Currently, I think the odds of who will be the next Fed chair are more important than the odds of rate changes because once the new pick is made, there will be a change in the Fed futures market. Currently, Yellen has a 27% chance of being picked, Warsh has a 20% chance of being picked, and Cohn has a 17% chance of being picked. Two of the top three nominees have been in President Trump’s bad graces in the past 12 months, so that just shows you how wide open the race is. I expect us to have a better idea of who the pick will be in two months. It could come as early as October. The administration is focused on hurricane relief. Once that’s mainly taken care of, the choice can be made.

Conclusion

The stock market is at a record high as the S&P 500 inches closer to 2,500. On the other hand, Bitcoin is down 20% from its recent record high. Weirdly, Jamie Dimon calls Bitcoin a bubble, yet ignores equities. Even worse, Dimon never called housing a bubble in 2007 the way he is attacking Bitcoin. While you can argue Bitcoin was frothy at $5,000, Dimon thinks it’s worthless, so he will never tell you to get back in on the dip. I think the further it falls, the better buy it is.