Welcome to our Friday mailbag edition!
Every week, we receive some great questions and comments from your fellow readers on our recently published essays.
And this week was no different…
But before I get to your questions, I want to again touch on the unfolding events in Ukraine.
If, like me, you’ve been glued to your TV screen, watching Russian troops invading and bombing Ukraine, and people fleeing for their lives, you’re probably worried about the future of the world around you.
On a personal level, this geopolitical uncertainty is unsettling, to say the least. I don’t know which way things will go in Ukraine, but I’m thinking especially of the millions of innocent people caught up in Putin’s land grab.
And it’s worrying, too, if you are thinking about what a potential war – and America’s potential involvement in it – could mean for your investments.
Now, during my career on Wall Street and since then, I have been through decades of conflicts. Each time, I watched the markets closely as they reacted to extreme external factors and events.
And the one thing I can tell you – based on my experience and also on the data – is that stock markets, in particular, are incredibly resilient. Especially right now, when they’re sitting on boatloads of central bank money.
So after the fog clears, whether it’s a geopolitical conflict or a pandemic, they rebound.
In fact, I wrote to you earlier this week about how U.S. stocks tend to dip in the buildup of conflict and then rebound once that conflict has resolved. Now, when I say “resolved,” that can mean a peaceful resolution… or when military action or war is officially declared… or when the market simply decides to move on.
And I said that I fully expected stock prices to rebound once investors process the shock of the situation in Ukraine.
And that’s what we’ve seen – so far – in the markets this week. Stocks had been trending down during the uncertainty around President Putin’s intentions. But once those intentions became known yesterday morning, U.S. stocks dropped initially… before rebounding to recover their losses by the end of the trading day.
But I want to prepare you. This isn’t to say that the markets are in the clear. Or that there won’t be more choppiness in the days, or possibly even weeks, to come.
But yesterday’s activity indicated the markets are in the process of finding their footing.
Overall, if there are further dips in the stock market, my advice to you is to sit tight. Don’t sell in panic. And remember, these are also opportunities to add small amounts to existing positions.
And what about other assets, such as oil and gold?
We have seen a significant rise in the prices of both at this point in the conflict cycle in Ukraine.
Oil has risen because of two concerns… First, that Russian president Vladimir Putin could decide to cut off supplies to Europe. Second, that the U.S. might decide to include energy sanctions in its latest round of injunctions against Russia.
Yesterday, oil prices shot over $100 per barrel, before falling back toward $90. That’s because the oil market processed the fact that U.S. president Joe Biden did not specifically include energy sanctions.
Gold has risen because it is seen as a safe haven in times of geopolitical pressure. Its role as a store of wealth is elevated. It is also considered a hedge against rising inflation, which we still have to contend with.
Even if gold prices abate at this point, they remain poised for further upside this year. So buying gold on any interim dips is a good strategy, even at these levels.
I’ll be monitoring the situation – and the markets – closely and will write to you if there’s anything new to report.
But remember, sometimes, the hardest thing to do when the world around you is swirling is to do nothing.
But it is also the very best, evidence-based advice I can give you.
In the Mailbag
Now, on to your questions from this week’s mailbag…
On readers’ minds this week were the benefits – or otherwise – of Bitcoin and gold… the financial disclosure requirements for members of Congress… and the long-running, cozy relationship between Wall Street and Washington…
And don’t forget, if you have any thoughts on anything I write here at Inside Wall Street, please be sure to pass them on to me at [email protected]. I love reading your feedback and questions! I try to respond to as many as I can.
First up this week… following my essays on the benefits of holding both gold and Bitcoin in your portfolio (catch up here and here), readers are divided on Bitcoin…
Your article on the advantages of Bitcoin was very interesting. You present a thoughtful argument for Bitcoin as a “hard” asset. I agree that, from a purely mathematical point of view, your case seems pretty solid. And Bitcoin does have some features that metals lack – namely, the ability to transact quickly and easily over long distances.
However, who cares if Bitcoin is limited? An infinite number of competitors can take its place. Businesses that used to accept Bitcoin now accept three or four different cryptos. So, if I decide to get into cryptos, Bitcoin’s value may be of little interest to me. I can choose from many other options, each of which is increasingly likely to be considered currency by an expanding number of companies.
Gold, however, will always hold its value because the supply cannot be expanded by human whim or changes in laws or algos. And it has no real competitors except silver. We’ll see where their values of gold and silver head relative to each other as the shortage of silver intensifies and the industrial uses for silver increase.
But there will never be any real replacement for gold in the monetary system or in art, jewelry, religion, or culture in general. Though cryptos are probably here for the long run, or at least until the electromagnetic pulse (EMP) arrives. (If nothing else, central bank digital currencies will assure that cryptos are being used in the system.)
Bitcoin itself may prove to be just a fad. I know, nobody thought Ham radio was a fad in the 1970s or dot-coms were a fad in the 1990s, but they both had their day. Now, Ham is a specialty geek niche, and everybody has something dot-com. Companies selling “dot-coms” as high-flying, exclusive tech in the 1990s all went bust in 2000. So I’m not ready to pin my fortunes on the cryptoverse just yet.
– Jennifer C.
Hi Jennifer, thank you very much for your comments about gold and silver, and cryptos. I agree that gold will always hold its value, as will silver. There is no replacement on the physical level. And I will always advocate holding gold or silver, regardless of whether one decides to add Bitcoin to his or her portfolio.
I want to underscore that I don’t advocate Bitcoin or other cryptocurrencies instead of gold or silver. I actually created a family ritual, whereby I buy a solid silver coin for my niece and nephews for every birthday. When they reach 18, I will give them their collection. I chose silver instead of gold because of the more amenable price of silver relative to gold.
Also, I agree with you. I don’t think anyone should pin their fortunes on crypto. The evolution of Bitcoin is still very much in flux. However, the usage of Bitcoin is broadening, especially online. There is also an increasing adoption of the blockchain technology that underpins Bitcoin across sectors from health to defense. I believe whatever Bitcoin ultimately does or doesn’t achieve, its path makes it a component of the New Money trends that I follow.
Gold. It has to be gold. Currencies are all now worthless without gold backing. In 1920, one ounce of gold would buy a good quality men’s suit. Today, an ounce of gold will still buy a good quality men’s suit. But in 1920, one ounce of gold was worth $20, whereas today, one ounce of gold is $1,900. It says it all, doesn’t it?
And the longer we go on giving in to the fiat currency BUGs, the more and the quicker our economy will collapse.
I have lived through it all here in Romania, so I won’t bother you again about this. But please, reach the national bank CEOs and give them what for! By ignoring these facts, they are causing the collapse now.
– Joe B.
Hi Joe, thanks for your passionate comments. Keep ‘em coming. You’ll get no argument from me on “gold is gold.” And you’re also right that the value of money, or the inflation of prices, has been a major negative byproduct of fiat currencies.
The fiat currency monetary system has led to inflated debt across the globe. When governments can borrow money at next-to-zero-percent interest rates, as is the case in the U.S. and other countries today, it’s easy not to have to worry about what debt gets used to produce in the real economy.
This is an ongoing problem of our current monetary system. It has intensified since the gold standard was demolished back in 1971. And it’s gone into overdrive since the financial crisis of 2008 and the early 2020 days of the Covid-19 pandemic.
Hi Nomi, I can’t really believe I’m reading this from you, whom I thought had the background in economics to understand about margins of utility. What you wrote, if in fact it wasn’t written for you by an Agora millennial staff person, appears to be written by someone with no background in Austrian economics or behavioral economics.
I spend my winters on an island in the Caribbean, where I know not a single soul could explain what a Bitcoin was or even care. If I was to tell them that there are more than 1,000 different digital moneys/tokens that people could have on their cellphones, I am sure their eyes would glaze over.
The fact that central banks and the International Monetary Fund (IMF) are working on creating their own versions of blockchain currency should be a signal to any investor thinking of that as a gamble. Perhaps token currencies are useful as a bet. But that one of the 1,000 different ones will be the end-all-and-be-all, replacing gold or silver as monetary wealth, I think you are sadly mistaken. Learn the basic difference between a currency and money as a store of wealth; that’s the key.
– Eric E.
Hi Eric, thank you for your observations. It’s true that the evolution and trajectory of Bitcoin has less to do with economies than with math, technology, and timing. When the financial crisis erupted in 2008, central banks went into crazy money-fabrication mode. Many banks that committed financial crimes got bailed out because central banks bought their faulty assets with this fabricated money.
By the time of the financial crisis, the computer science that led to the development of Bitcoin had been around for decades. But the timing of the official launch of Bitcoin was due to the financial crisis revealing how faulty the monetary and banking systems were.
About 14 years have passed since then. And even if most people can’t explain how Bitcoin is computed (which admittedly, is not an awesome thing), they know it exists or are investors in, or users of, it.
I remember when my dad took me to his work at IBM. He showed me the rooms where all these giant mainframe computers lived – all of them bigger than me at the time. All they did, all day long, was process data. Today, what they did then can be done on our iPhone in seconds.
This isn’t to say that Bitcoin will overtake gold in historical value or become the worlds’ reserve currency, like the U.S. dollar has been. But I believe there’s a transition happening with respect to fiat money. Perhaps it will take decades. But I think Bitcoin has some yet-to-be-determined role in that.
And Andy has a question about the Stock-to-Flow (SF) ratio I wrote to you about recently, when describing an important benefit of gold and Bitcoin – their hardness…
Hi Nomi. I appreciate your work – thank you! I get that Bitcoin is a “hard” asset. Per its code, no more than 21 million Bitcoin can be mined, and there is something like 18 million Bitcoin already in existence. Don’t these facts make the Stock-to-Flow metric impossible to calculate for Bitcoin? The current stock of Bitcoin can never be mined because there are only roughly 3 million Bitcoin that can ever be produced. How are you calculating the numbers in your essay? Thanks again!
– Andy L.
Hi Andy. Thanks a lot for your question. At the current rate, it is estimated that 900 new Bitcoins are mined per day. This puts the current annual flow of Bitcoin at 328,500 (so, roughly .33 million). As of February 2022, the circulating supply of Bitcoin is 18.97 million. This gives Bitcoin a current stock-to-flow ratio of 57 (18.97 million ÷ 0.33 million). Put differently, at the current rate of new supply, it would take 57 years to equal the existing Bitcoin supply.
But because the amount of new Bitcoin is automatically reduced by 50% every four years via the “halvings” I wrote about, Bitcoin’s inflation rate will continue to decrease. For instance, before the most recent halving in May 2020, the number of Bitcoins mined per day was 1,800. As I said above, today, it’s 900. And after the next halving, due in 2024, this will be cut in half to 450 Bitcoins per day.
Again, the upshot of the halving is that the remaining Bitcoins will be added at an ever-decreasing rate. And this will improve its hardness. Hope this helps!
Next up, Jon T. sent in a great question in response to my recent essay on the investing habits of our elected officials in Congress…
Hello Nomi, I like reading your newsletters as they always contain useful, relevant, and interesting content. The questions/answers are also astute and enlightening.
Which segues into one question following up on the sentiment that many, if not most, members of Congress make their dollars during their stint “legislating on behalf of the people.”
As I’m not an IRS expert, or have neither the bandwidth nor interest of delving into financial disclosure requirements for members of Congress, could one not gain an idea of the financial transactions of personal or family foundations via their Form 990 reports?
– Jon T.
Hi Jon, that’s an excellent question. Yes, the Form 990 reports can provide the IRS with certain detailed financial information about the activity of organizations, like foundations, that apply for tax-exempt status. These can also be looked up on the IRS website. And all non-profits with more than $250,000 in assets are supposed to report this.
Just for fun, I’m attaching a link to Paul and Nancy’s Pelosi’s private foundation 990 report for 2020 (the latest one available) here. It shows $1.9 million of net assets over 2020, up from nearly $703,000 the prior year. Going into more analysis of it, however, is beyond the scope of this Q&A.
And finally for this week, a great book recommendation from one of our readers…
Earlier this week, I sent you an excerpt from my book All the Presidents’ Bankers. In it, I outlined the influence central bankers of the time exerted over President Woodrow Wilson when he was setting up the Federal Reserve.
John G. suggested another great book for anyone interested in the long-running relationship between Wall Street and Washington…
Nomi, another book, written by Ed Griffin, The Creature from Jekyll Island, is perhaps the most revealing discussion on the topic of the formation of the Federal Reserve. One area that he discussed in this excellent exposé is the reason why we entered World War I. We did it to protect J.P. Morgan’s financial interests. All of those lives were lost to keep him rich. Read this book.
– John G.
Hi John, let me just say, “thank you” for bringing up The Creature from Jekyll Island, by G. Edward Griffin. It’s one of my favorite books. It’s well-worn and full of yellow sticky notes on my bookshelf. That book also prompted me to do my own research at Jekyll Island itself. I visited there when I was writing my book, All the Presidents’ Bankers.
That part about World War I and J.P. Morgan is super-interesting. (Actually, by that time, J.P. had died, and his son, Jack Morgan was at the helm. But they were basically interchangeable.)
I discovered another element that had never been disclosed about the relationship between Jack Morgan and President Wilson at the onset of World War I. It’s in my book. I think you and other readers might find it interesting. I certainly did!
In fact, I’m going to ask my editor if she can excerpt that section for you next week. I’d love to know what you think of it.
That’s all for today! Thanks to everyone who wrote in.
If I didn’t get to your question this week, please write me at [email protected]. I’ll do my best to respond in a future Friday mailbag edition.
Happy investing… and have a fantastic weekend!
Regards,
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Nomi Prins
Editor, Inside Wall Street with Nomi Prins
Like what you’re reading? Send your thoughts to [email protected].