Barron's Streetwise - Bitcoin v. Gold v. the Wobbling U.S. Dollar

Episode Date: July 31, 2020

Is the greenback's recent slide the start of a bigger move, and what should investors make of gains for cryptocurrencies and precious metals? Learn more about your ad choices. Visit megaphone.fm/adchoices

Calling all sellers, Salesforce is hiring account executives to join us on the cutting edge of technology. Here, innovation isn't a buzzword. It's a way of life. You'll be solving customer challenges faster with agents, winning with purpose, and showing the world what AI was meant to be. Let's create the agent-first future together. Head to salesforce.com slash careers to learn more. My personal belief is, you know, allocating to Bitcoin is a logical approach and it should have a role in everyone's portfolio in the same way that many people believe gold or commodities should as a diversifier. Welcome to the Barron Streetwise podcast. I'm Jack Howe. The voice you just heard, that's Meltem Demirors. She's the chief strategy officer at CoinShares,

which is a cryptocurrency investment firm. And she's come the closest of anyone yet to talking me into the merits of Bitcoin. More of that conversation in a moment. Plus, why Goldman Sachs says the US.S. dollar will keep falling and what to do about it. Also, what Ed Yardeni of Yardeni Research tells me about the rising price of gold. With me as always is our audio producer, Meta. Hi, Meta.

Hi, Jack. Are you active on Twitter? Do you send messages every day? Messages? Yeah. As in tweets? Tweets, Jack. Are you active on Twitter? Do you send messages every day? Messages? Yeah. As in tweets? Tweets, yeah. You just revealed how good at Twitter you are.

I was really going strong there. I got started earlier in the year, and I think I went pretty well for like a month, but I just can't stick with it. I'm sorry for everyone for being such a terrible Twitter follow. Everyone I said, follow me on Twitter. You know what? I stink on Twitter and I take it all back. But I bring it up to say that I saw a hilarious tweet where someone just asked,

hey, does anyone out there have opinions on Bitcoin? Which is funny because on Twitter, it seems to be all anyone has is passionate opinions on Bitcoin, especially now that it's going up. And I understand, Meta, that we have a question on the subject of Bitcoin. We do, yeah. We have a question from Fritz. Hi, Jack. Longtime Barron subscriber.

I love your column. I have a question. I would like to know how I should use Bitcoin as some sort of hedge in my otherwise long equity portfolio. Thanks a lot. Love the pod. Hi, Meta. Fritz, I have a longstanding policy of loving people who love my column or the podcast, which means I love you. And to prove it, I'm going to do a whole episode on your Bitcoin question. Now, for folks who aren't sure exactly what Bitcoin is, I'll explain it in a moment. For now, just know that I first wrote about it way back in 2011. Not many people had heard of Bitcoin at the time. I pointed out something shocking. It had increased in price from

half a penny to about $10.50 in the space of a year. That made it the world's top gaining currency by far. What no one could know at the time was that Bitcoin would continue rising to an all-time high of close to $20,000 hit in early 2017. What is up guys? This is Chris back with another video and we are absolutely going ham here with the Bitcoin price. We are at an all time high here today.

We are approaching 20K. The price has been all over the place since then, including a brief drop below $3,000 in late 2018. Bitcoin getting a beat down today, falling below 5,000 for the first time in more than a year, down another $300 in the past hour. But this year, Bitcoin is on the march again. It started the year around $7,000 and it recently topped $10,000, then $11,000.

So why is it rising again? Hold that thought. I want to talk about another recent gainer, gold. You might have heard that it's been hitting all-time high prices and that it's closing in on $2,000 an ounce. It was recently up 35% over the past year. So why is gold rising? In grade school science, we all learn that motion is relative. Tom might be standing still from the perspective of Sarah, who's sitting next to him on a train. But from the perspective of Edward, who's standing on the platform as the train goes whooshing by, they're both moving quite quickly. And likewise, when we say Bitcoin, gold, and for that matter, U.S. stocks are rising

quickly, we mean that they're rising relative to something. The price movements I mentioned were relative to the U.S. dollar. So are those things really rising or is the dollar falling? Lately, it's been a combination of the two. We can take assets out of the picture and look at just the U.S. dollar relative to pure currencies. There's something called the U.S. dollar index. It tracks the buck relative to six currencies. The euro gets the heaviest weighting in the index by far, followed by the yen, the British pound, Canadian dollar, Swedish krona, and Swiss franc. Since the middle of May, the U.S. dollar is down about 5% relative to those currencies. Now, I know that might not sound like much, but Goldman Sachs recently pointed out that

the dollar's two-month decline ranks among the most extreme 2% of two-month movements going all the way back to 1973. And Goldman predicts the dollar will fall another 5% over the coming year. Its strategists wrote recently, quote, the greenback remains overvalued by most metrics and offers poor fundamentals. For another perspective on the dollar, I reached out to Ed Yardeni, who runs a consultancy with a focus on monetary matters called Yardeni Research. Hi, Ed. It's Jack Howe from Barron's. How are you? Hey, just fine, Jack. I asked Ed why the dollar has been falling, and he gave two reasons. One is the virus. I think there's a

perception which can change that the U.S. is, we're not doing as good a job as Europeans and some Asian countries in opening up our economy and maintaining social distance. I mean, those perceptions can change pretty rapidly because already the government health officials are saying that maybe we're starting to plateau in the United States. I take Ed's point, and here's hoping we have started to plateau, although it's early to say for sure. The U.S. Centers for Disease Control, in its latest weekly report, writes that indicators for the virus improved nationally over the past week, but with important regional differences. Things got better in some of the hardest-hit regions, but worse in some other regions.

There's a second reason Ed gave for the falling U.S. dollar. It might be declining now because it had already gone up a lot. Part of it is a correction. I mean, the dollar had a heck of a run since 2008, and it had a huge run up when the pandemic first made the headlines. That's an important point. Earlier, I mentioned that the dollar was down 5% since mid-May, but before that, it had gained 4% from the beginning of the year through mid-May. Whether the dollar is higher or lower

now depends entirely on the starting point we use. It's still up over the past three years, but it's down over the past five, and it's up sharply over the past decade, about 14%. Investors have directed money toward the U.S. because in a slow growth world, the U.S. has been growing a bit faster than its peers, and the dollar has gained. Now investor confidence has been shaken by the U.S. attempt to reopen its economy without all of its citizens taking proper precautions, resulting in virus spikes in some states. Quick side note, if that sounds like a political statement, that's part of the problem. We have two viruses raging in America right now, and the second one is partisan politics, which is turning everything into a culture war and stopping us from working together

to do the things we know we should do. If you're an American listening to this podcast and you're sniffing me now to figure out which party I side with, the answer is neither, but I still like you. And if you're listening from outside the U.S. and wondering why Americans spend so much time sniffing each other these days, don't panic. We're going through a bit of a thing right now, but it will pass. Better days will come. Anyhow, our virus surge has contributed to investors trimming their expectations for a U.S. economic recovery, which has weighed on the dollar. Now, will the dollar continue falling?

Remember that Goldman says so, and its recommendation for U.S. stock investors is to favor sectors and companies with a high mix of international sales. favor sectors and companies with a high mix of international sales. It mentions energy and tech, and it also tracks an index of companies with high non-U.S. sales. The names there include McDonald's, Applied Materials, Colgate-Palmolive, Facebook, and Alphabet. Ed Yardeni disagrees about the dollar continuing its slide. He points out that the dollar accounts for well over half of non-gold reserves held by central banks. Presumably, those banks wouldn't want to see the dollar fall too much against their own currencies because it might make it more difficult for their exporters to compete. And speaking of the competition, Ed also mentioned a

recent European Union agreement to issue EU bonds for COVID-19 relief. Until now, taking on debt has been largely the role of member nations. He says that raises the perception that the monetary union won't split apart and will remain solid, which has contributed to the rise in the euro. It's up almost 9% versus the dollar since mid-May. Keep in mind that the euro is the largest component of the dollar index. In other words, the rising euro also helps explain the falling dollar. I also asked Ed about gold. Some weeks ago on this podcast, I answered a listener question about gold, and I made a case that it looks more like a speculative vehicle

than an asset that's a dependable store of value or a hedge against inflation. But I said that if it makes you feel better to buy some gold, go ahead. Just don't overdo it. Ed is a bit more open to gold. In the past, when you asked most advisors what mix they would put in gold, they might have told you, you know, 5% at most, 10% is a little bit too much. But I don't really have a problem with maybe 10% of the portfolio in gold here. Okay, how about some Bitcoin to go with that gold? Here's Ed.

Yeah, that's not for me. You know, Bitcoin, I don't know what it is. I mean, it's a digital currency that is prone to criminal activity. I noticed not too long ago that various state and local governments were being held up for ransom. And every time you hear the headlines like that, Bitcoin would go up in value. So there's some of that. But it is kind of like gold. If enough people agree that that's where you want to be during periods of turmoil, then Bitcoin will go up. But if the choice is between gold or Bitcoin, I'd rather go with gold. So Ed Yardeni is no fan of Bitcoin,

and I guess I've made some skeptical comments too. In February, I wrote for Barron's that I secretly suspect that cryptocurrencies are an elaborate game of Dungeons and Dragons, only with metrics like hash rates replacing wizard spells and hit points. Maybe that was unfair. I also wrote that Bitcoin might go up because with interest rates this low,

conditions are perfect for a flight to nonsense. Maybe that was unfair too. I can't really help it. By nature, I'm a financial poo-pooer. My portfolio was recently 60% stock index funds, 40% bonds and cash, and 100% poo-pooing of all the other stuff that people say that I have to buy to find Alpha wherever he is, or to hedge my tail risk, or to tail my hedge risk. But look, Bitcoin now has a market value of $200 billion. That's close to the market value of Coca-Cola.

It deserves serious treatment. So I reached out to Meltem Demirors. Hi Meltem, it's Jack Howitt, Barron's. How are you? I'm delightful. How are you, Jack? Doing well. How have I done with your name?

Do you say Meltem? It's like what you do with s'mores, you Meltem. Your middle name isn't like Marshmallow or anything like that, right? It's not. I wish it was. It would have made my life a lot easier. This is probably a good time to explain what Bitcoin is. Meta, could you put 60 seconds on the clock, please?

You got it. Bitcoin is money that exists on a decentralized peer-to-peer payment network that records transactions on a public ledger called the blockchain. There are no actual coins. The money is digital and there's no central bank. New bitcoins are created through a process called mining, but there's no digging involved. Bitcoin miners put the processing power of their computers to work in a system that rewards them with shiny new bitcoins. I picture them as shiny anyway.

There's no danger of over mining. For one thing, the mining reward gets cut in half every four years on average. It happened earlier this year, for example. And for another, there will only ever be 21 million Bitcoins made, which probably means that Bitcoin mining will end somewhere around the year 2140. Meta, I won't ask you what episode of the podcast we'll be on by that year. And I won't ask you how I'm doing on the 60 seconds. I assume I'm still way under. We probably used about 10 seconds so far, right?

Yeah, like 9 or 10 seconds. I think you're good. Now you can buy Bitcoins through exchanges like Coinbase or Gemini in the US, or through some stockbrokers like Robinhood. You can store your Bitcoins online in the cloud, either where you buy them or elsewhere in what's called a hot wallet, or on a small encrypted portable device called a cold wallet. I'm definitely going to try to give someone the nickname hot wallet first chance I get. If you lose your wallet, those Bitcoins are basically out of action forever.

You can spend Bitcoin at a limited number of stores like overstock.com, but there are also businesses like CoinCards, which allows you to exchange Bitcoins for gift cards issued by many stores, including Home Depot and Amazon. Who created Bitcoin? It's unclear. There was a proof of concept published in 2009 on a cryptography mailing list under the name Satoshi Nakamoto. But he, she, or they quickly went quiet, and the project was taken over by independent developers. There have been attempts to discover the identity of Satoshi, whom many believe sits on billions of dollars worth of Bitcoin, but those attempts haven't been successful. Jack, I have a confession. Yeah. I'm Satoshi. I should have known it. One last thing. Why would someone buy Bitcoin? Well, maybe to transfer money with low fees,

maybe out of curiosity to see how the technology works. Maybe out of fear that fiat money, that's money backed only by the say-so of governments like the US dollar, will one day rapidly lose its value, or collapse. Maybe out of anticipation that other people will feel that way about fiat money. Maybe to hide money from people who want to know how it was made or whether tax is owed on it. But I suspect that a lot of Bitcoin buyers have simply seen that the value has gone up in the past and hope it will do so again. I asked Meltem what she thought was behind Bitcoin's recent rise and she did mention

increased talk about massive deficits and money creation brought on by government efforts to fight the economic slump. But she also mentioned two other factors. One is that there's been a lot of gains recently in something called tokens. Here's Meltem. A lot of people were pouring capital into that space. And I think what we saw is people were taking profits and parking them into Bitcoin. what we saw is people were taking profits and parking them into Bitcoin. Tokens, if you're wondering, are crypto assets that are built atop existing blockchains and that usually relate to a

specific product or service. Here's an example. In June, the Spanish soccer club FC Barcelona issued 1.3 million dollars worth of fan tokens that sold out in under two hours. Holders of these tokens can participate in surveys that give them some input in running the club. The first of these surveys, it decides which mural will go in the team's locker room. Please don't get me started about my passionate views on locker room murals. Now, Meltem also mentioned a boom in new products for crypto savers that allow them to earn interest, pay to more cryptocurrency, of course. The yields are at levels that holders of US dollar or euro savings can only dream about.

It ranges from 7% to 35%. Some of them, when they initially launch, is as high as 100%. So you can imagine in a Zerp environment, people are pretty excited. If you didn't catch that, Meltem said that people are pretty excited in a Zerp environment, Z-I-R-P, and that stands for Zero Interest Rate Policy. And those rates near zero are the reason

that a lot of bonds right now pay squat. Cryptocurrency investors have been hopping from one product to another in search of better yields. And there's a name for that. This craze has actually been called yield farming, which you might appreciate. Oh, I love it. I love the name. Yeah, it's quite fun. So people call themselves yield farmers. But again, I think all of this is reflective of the fact that people are looking for new ways to build markets and market infrastructure. I confess to Melton that sometimes I view Bitcoin as a proxy for speculative excess.

When it's running up, I wonder if it's time to worry about everything, including stocks. And other times I view it as an expression of financial nihilism. expression of financial nihilism. People are frustrated by some of the policy decisions they see, and it leads them to believe the world financial system is about to go kablooey, so they might as well buy some Bitcoin. But I'm not a doomsday guy or a trend chaser. Why should I buy Bitcoin? Meltem says its demand comes from people being committed to it, and that the community of committed people like herself is large, and that many are drawn to the technology. The idea is that instead of relying on the correspondent banking system, or these large monolithic platforms, what you can do is build an open technology driven software driven system for value that operates 24 seven without the need

for these large intermediary institutions. Meltem doesn't have a specific price forecast for Bitcoin, but she's bullish. Suffice it to say, I wouldn't be here building this business and I wouldn't be here speaking with you if I didn't believe there was tremendous growth potential in Bitcoin as an asset class and this industry as a technology ecosystem. But what about the volatility? Aren't the wild price swings for Bitcoin at odds with a desire for it to become a true currency, a stable store of value? Meltem says that for now, Bitcoin doesn't have to act like a true currency.

I think right now I really view Bitcoin as savings technology. And as a financial asset, I don't need to buy coffee with my Bitcoin in the same way that I don't need to buy coffee with gold, right? You don't go to the coffee shop and chip off a little sliver of gold to purchase your morning coffee. So I would just functionally separate Bitcoin's properties as a savings technology from this idea of having digital money that facilitates payments? I guess I like that answer. I mean, I'm not quite talked into it yet. But if I were, how much of my stash should I put in Bitcoin? I think it really depends on what you're trying to achieve. But I think for most people, a single digit allocation, one to three percent

makes sense, particularly if they have an allocation to gold. Many people sort of characterize Bitcoin as gold for a digital era. That seems reasonable. I don't think investors with an eye for gold or Bitcoin are going to hurt themselves by putting, say, five percent in gold and two percent in Bitcoin. I mean, I'm not a buyer, but I'm not going to call themselves by putting, say, 5% in gold and 2% in Bitcoin. I mean, I'm not a buyer, but I'm not going to call the idea nutty. Or at least, it's no nuttier than some of the mainstream investments I've been seeing. There's a type of U.S. Treasury bond that promises to keep up with the rate of inflation. It's called TIPS, T-I-P-S, and that stands for Treasury Inflation Protected Securities. So how much does

the 10-year TIPS pay buyers right now? It doesn't. The buyers have to pay almost 1% a year. Lenders paying borrowers? That's nutty. Meta, I know we started with a listener question, but we usually end with one. Do we have time for a quick one? Yeah, let's do the question we have from Jack. He is from New York and he is 16 years old. Is his question, will I buy him beer? No, it's not. Then let's hear it.

So I was wondering what you thought about the current situation of tech stocks. I feel that a lot of them, including Shopify, are very overvalued, but I don't think there's any way I could sell them with the rate that they're growing currently, even though I know that they might bust eventually, just like what Warren Buffett talks about tech stocks in the 2000s. Let me know what you think. Thanks for your show. I listen to it every Friday. Bye. Thank you, Jack. Shopify is up more than 200% over the past year, and it traded recently at 49 times this year's projected revenue, not earnings, revenue.

Now, that's a super-duper high valuation, as you say, but the company is also expected to quadruple its revenue over the next four years, and that's super- duper fast growth. It's incredibly difficult to tell whether a stock like that has gotten ahead of itself, especially because in the short term, stock prices are driven by investor enthusiasm and not necessarily financial fundamentals. And because it's unclear the extent to which the current combination of ultra lowlow interest rates

and a shortage of fast-growing companies is distorting some stock prices. Now, only one-third of Wall Street analysts who cover the stock say to buy it, but that tells you nothing. Amazon founder Jeff Bezos this past week mentioned Shopify in his testimony to Congress to argue that Amazon isn't anti-competitive because Shopify is out there empowering small businesses to compete with giants online. I think that tells you something. If I were you, and if my Shopify shares had become too large a part of my portfolio's value, I'd be tempted to sell a portion and diversify. But I'm not you, and your returns this year almost certainly top my returns. So make your own decision. You clearly know enough, and you're plenty old enough. Cornelius Vanderbilt was one

of the wealthiest Americans ever. He made his money in railroads and shipping. Guess how old he was when he started his first ferry service? You've got it Jack, 16. You're off to a great start. I mean don't try starting a ferry service, okay? But do stick with stocks. Thank you Fritz and Jack for sending in your questions on Bitcoin and Shopify. And everyone, please keep the questions coming. Just tape on your phone, use the voice memo app and send an email to jack.how. That's H-O-U-G-H at barons.com. Thank you for listening. Meta Lutzoft is our producer. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts. And if you listen on Apple, please write us a review.

If you want to find out about new stories and new podcast episodes, you can follow me on Twitter. That's at Jack Howe, H-O-U-G-H. But like I said earlier, I'm a terrible Twitter follow. My apologies in advance. See you next week.