What is the probability of the price of gold falling to less than $100/oz before the year 2100? (Currently over $1000.) Approximately 0%?
It could be replaced by bitcoin, though it hasn't been replaced by any other currency yet.
What is the probability of the price of bitcoin falling to less than $100 before the year 2100? (Currently over $3000.) More than 1%?
It could be replaced by another cryptocurrency.
Demand for stores of value is distributed over various commodities. If demand remains constant, one currency's gain is another's loss.
Monday, 25 February 2019
Bubble dynamics
In a bubble, prices rise gradually, but they can crash suddenly. The stock market can fall 30% in one day, but it will never rise 30% in one day, though it might in one week. The reason people were so terrified about the 2010 Flash Crash was because it could have turned into a real crash, kicking off a depression.
Land and bubbleicity
Land exhibits bubbleicity. If the interest rate is 5%, the (risk-adjusted) return on a piece of land is unlikely to rise much above that, because entrepreneurs will bid up the price of the land, lowering the return. However, it is possible for the return on land to fall below the interest rate, far below it, as people bid up the price of land even further. Some property in London has a return of 5%, other property only 1%. People are over-paying for land. Why? Because they expect to be able to sell it to someone else for at least the same price. It exhibits bubbleicity, a permanent bubble. It is being used as a store of value.
The price of money
There is no fundamental way to value money. Money is in a permanent state of bubble, and there is no fundamental way to value something in a bubble.
Therefore, there is no fundamental way to value an exchange rate. All you have are historical prices. The only reason the health of a country's economy affects the price of its national currency is because people expect it to, but it doesn't have to.
Imagine a government issues a new currency: one million blank pieces of green paper. These will find a market value. If the same government issues another currency, one million blank pieces of blue paper, these will also find a market price. They are effectively different currencies. Just because they are issued by the same government, and the same quantity, there is no reason why they should reach the same price. People might start using one for small change, and one for higher-value transactions.
Imagine instead that the government issues green and blue paper as above, but prints the number "10" on the greens and "1" on the blues. Now we might expect them to trade at a ratio of precisely 10 to 1, and they are effectively one currency.
Therefore, there is no fundamental way to value an exchange rate. All you have are historical prices. The only reason the health of a country's economy affects the price of its national currency is because people expect it to, but it doesn't have to.
Imagine a government issues a new currency: one million blank pieces of green paper. These will find a market value. If the same government issues another currency, one million blank pieces of blue paper, these will also find a market price. They are effectively different currencies. Just because they are issued by the same government, and the same quantity, there is no reason why they should reach the same price. People might start using one for small change, and one for higher-value transactions.
Imagine instead that the government issues green and blue paper as above, but prints the number "10" on the greens and "1" on the blues. Now we might expect them to trade at a ratio of precisely 10 to 1, and they are effectively one currency.
Fundamental versus technical analysis
Fundamental analysis works. Technical analysis doesn't.
People make money by examining corporate accounts and having a view on future demand, then buying companies and commodities they think are undervalued. No one can consistently make money if all they know are historical market prices, and no one has gotten really rich doing so. You can get somewhat rich by luck, but the richest traders are nowhere near as rich as Warren Buffett.
(The momentum strategy does appear to work, but its risk-weighted returns is not as good as fundamental analysis, and I believe it conceals hidden risks. It cannot work in the long run, which is to say, it does not work. The occasional losses must wipe out all the gains.)
But how do we value something if we believe it is in a bubble? There is no way to do so, and fundamental investors will stay out. Bubble traders (relying on more than just technical analysis) can try to ride the bubble, though they also are the bubble and can get burned.
The problem for fundamental analysts is when the stock market as a whole is in a bubble. And this is almost always the case! The stock market exhibits bubbleicity. Commodities like oil exhibit bubbleicity. In addition to big bubbles, there are small, constant bubbles. Passive investors reinvest their dividends and to a certain extent just bid up prices. These small bubbles don't have to pop! Passive investors sell their investments when they retire, but these are bought by new investors, potentially sustaining the bubble indefinitely. It's just the same as with gold: old people sell gold to young people, and the bubble stays inflated. The gold price can stay high permanently.
A fundamental analyst cannot just short the stock market if he thinks the whole thing is overvalued, because it can stay overvalued indefinitely and he will lose. And what else can he do with his money?
People make money by examining corporate accounts and having a view on future demand, then buying companies and commodities they think are undervalued. No one can consistently make money if all they know are historical market prices, and no one has gotten really rich doing so. You can get somewhat rich by luck, but the richest traders are nowhere near as rich as Warren Buffett.
(The momentum strategy does appear to work, but its risk-weighted returns is not as good as fundamental analysis, and I believe it conceals hidden risks. It cannot work in the long run, which is to say, it does not work. The occasional losses must wipe out all the gains.)
But how do we value something if we believe it is in a bubble? There is no way to do so, and fundamental investors will stay out. Bubble traders (relying on more than just technical analysis) can try to ride the bubble, though they also are the bubble and can get burned.
The problem for fundamental analysts is when the stock market as a whole is in a bubble. And this is almost always the case! The stock market exhibits bubbleicity. Commodities like oil exhibit bubbleicity. In addition to big bubbles, there are small, constant bubbles. Passive investors reinvest their dividends and to a certain extent just bid up prices. These small bubbles don't have to pop! Passive investors sell their investments when they retire, but these are bought by new investors, potentially sustaining the bubble indefinitely. It's just the same as with gold: old people sell gold to young people, and the bubble stays inflated. The gold price can stay high permanently.
A fundamental analyst cannot just short the stock market if he thinks the whole thing is overvalued, because it can stay overvalued indefinitely and he will lose. And what else can he do with his money?
Saturday, 23 February 2019
Bubbleicity
Moldbug calls money the bubble which doesn't pop. It is a bubble because nobody values it for its own sake, people only purchase it because they intend to sell it to someone else. (Unlike a retailer, who purchases things he doesn't intend to use, but sells them to people who do intend to use them.) Or some people do value it for its own sake, but the market price is far above what it would be if only those people were purchasing it. (For example, gold, which does have uses in electronics and medicine. It is useful as jewellery, but historically it is desired as jewellery because it is money.)
Money bubbles can pop. Sometimes a particular currency will "de-monetise". But they don't have to. There is no reason why a bubble can't keep going indefinitely, with the price levelling off well above the use-value.
The art bubble has been going for hundreds of years with no expectation of popping. The Mona Lisa is a scarce collectible. Its market value is well above that of identical copies, even though identical copies have identical use-value.
I call this "bubbleicity". Money has bubbleicity. Famous artworks have bubbleicity.
The cost of producing the artwork sets the floor price (which could be zero). The scarcity of its provenance can push the price above that. Or to look at it the other way around, the scarcity of gold sets the floor price of jewellery, and then there is a small premium for the design and workmanship (which could be zero).
People sometimes argue whether money is valued because it is a medium of exchange, or because it is a store of value. But you can't have one without the other. You can't have a medium of exchange unless it can store value across time. And you can't have a store of value unless you can exchange it at a future date.
In practice, people may use several commodities as money. They might keep gold in their vaults, for big transactions, and copper in their purse, for small transactions. But that doesn't mean one is the store of value and one is the medium of exchange. They are both stores of value and both media of exchange.
Money bubbles can pop. Sometimes a particular currency will "de-monetise". But they don't have to. There is no reason why a bubble can't keep going indefinitely, with the price levelling off well above the use-value.
The art bubble has been going for hundreds of years with no expectation of popping. The Mona Lisa is a scarce collectible. Its market value is well above that of identical copies, even though identical copies have identical use-value.
I call this "bubbleicity". Money has bubbleicity. Famous artworks have bubbleicity.
The cost of producing the artwork sets the floor price (which could be zero). The scarcity of its provenance can push the price above that. Or to look at it the other way around, the scarcity of gold sets the floor price of jewellery, and then there is a small premium for the design and workmanship (which could be zero).
People sometimes argue whether money is valued because it is a medium of exchange, or because it is a store of value. But you can't have one without the other. You can't have a medium of exchange unless it can store value across time. And you can't have a store of value unless you can exchange it at a future date.
In practice, people may use several commodities as money. They might keep gold in their vaults, for big transactions, and copper in their purse, for small transactions. But that doesn't mean one is the store of value and one is the medium of exchange. They are both stores of value and both media of exchange.
Saturday, 9 May 2015
Fewtril
It is not the case that all leftists favour equality because they believe that everything is zero-sum. Some are against the positive-sum because they favour equality.
"Is having a loving family an unfair advantage?"
"Is having a loving family an unfair advantage?"
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