Black Swans & Bitcoin - Have You Got A Plan?


What’s the plan when your first one no longer works?

Photo by Lubos Chlubny

As the world continues in different gears, some in reverse, to battle both the virus and the economic impacts of the shutdown, we went back and reread “The Black Swan” by Nassim Nicholas Taleb. With these insights in mind, we discuss how not all data has the same value and we try to identify the data that can be relied on. We compare gold and cryptocurrency and how the delivery has proved an unforeseen factor that has impacted price. The EC issues another pessimistic report for the future and we discuss what we are watching out for over the next week.

Black Swan Bitcoin planning

This week we revisited the seminal economic book “The Black Swan” by Nassim Nicholas Taleb. To those who need reminding, Taleb detailed what he called "Black Swan events". Rare, but not impossible, shocks to the economic system. 

They are nearly impossible to correctly forecast and when they occur the devastation is magnified in our highly interconnected world. He argues, correctly in our view, that we need to build a less fragile structure to withstand these shocks. 

This is applicable everywhere from corporate supply chains to your own personal investment strategy. Investors have two unknowns when deciding where to allocate their capital. First, if something is going to happen, and secondly, when it’s going to happen. Getting one right and the other wrong can result in large losses with little comfort of having been right on the former.

The concept then is to make your investments less fragile. Less prone to shocks that will definitely happen but you won't know about until after the fact. Right now there are societal, economic, and political disruptions going on all over the world, and holding at least some cryptocurrencies may be a wise hedge against these systemic risks, from where we are sitting. 

Taleb's book further argues that there are three types of people/businesses. Those that fail immediately from any shock, those who struggle through and a third who revel in the turmoil. Which one are you?

Data mining - Finding the nuggets

As anyone who has been reading us recently knows, we attach very little value to recent economic data indicators. We have argued that it’s too early in the cycle to make any declarative statements. As more data comes in, we will begin again to attach more value to the traditional headline numbers. This does not mean, however, that we will be ignoring the other indicators we’ve found more than helpful in recent months.

The question everyone is trying to get an answer to is when we will get back to “normal”. Media reports will always go where the action is but this is rarely any kind of reliable backdrop to finding a trend. Entering the shutdown-shocks was a surprise and it will be some time before we know we are out of it. We use what we can to spot the trends, the signals, and to block out the noise.

To date, we have been paying particular attention to two publicly available data sets.

The OpenTable - State of the Industry report is an excellent resource for gauging people's willingness to re-enter the economy and resume spending. Essentially it is a real-time record of restaurant bookings in some of the world's major economies. We have been checking this regularly and matching it to market activity. We don’t see a direct correlation between it and the markets yet, although we would argue that not enough people are watching it. We think they will be soon.

The Transport Security Admin (TSA) daily report gives a guide to the number of people traveling through airports in the U.S. It compares the daily numbers to those of the same day last year and we can see that we’re still a long way off resuming normal activity.

Again, useful for spotting a trend and a possible warning sign if people's economic activity begins to retreat. This should increase the validity of the cryptocurrency safe-haven status in the medium term.

 Receiving Gold is harder than receiving Bitcoin

Photo by K.unshu 

Gold is hard to deliver on

We have regularly referred to Bitcoin as digital gold. This is an easy comparison to make as both are a store of value and both tend to attract more interest during times of turmoil. In recent months, the coronavirus has exposed one glaring difference. It’s the kind of fundamental difference that affects both the price and the trust in completing a purchase.

In the initial days of the lockdown, many were shocked to find that despite the increased activity in the gold markets, buyers were unable to get speedy physical delivery of the actual gold bars. If they did manage to get storage space on a plane, they were often knocked back to make room for medical supplies. 

As time went on, gold brokers began to adapt but the physical barrier was not easy to get around. When one did get around it, by either chartering their own flights or relying on an international courier, the costs of delivery were high enough to affect headline prices.

It’s one of those unforeseen glitches that we see in many different industries and highlights the simplicity of holding a cryptocurrency rather than something we need a letterbox for.

EC report with caveats

The European Commission (E.C.) came out this week with downward adjustments to their forecasts for the rest of 2020 and into 2021. With all of their best work they still preface every declarative statement with the fact that they ultimately admit to having very little certainty about anything. 

Science tells us that amongst the characteristics of a viral pandemic, is the second wave along with variations and mutations that make it very difficult to manage. By going into lockdown the world shot the virus with the biggest weapon in its current arsenal and all will have been a waste if it gets a hold again.

Within the actual title of the report are the words - “A deeper recession with wider divergences”. That says it all really.

We highlight this report for two reasons. It admits, in effect, that earlier, rosier forecasts were woefully inadequate, which we said at the time. More importantly, it would suggest that once they, and the rest of the world economies, adjust their initial plans, there will be a further injection of new money.

This brings us absolutely no joy but more cash normally means more inflation and thus a reduction in the value of existing cash holdings. Regardless of your home country, it’s a well written, concise report and should be read as a precursor of other reports from the U.S. and elsewhere in the near future. If you believe the report has credibility, then moving your cash to other assets is something you should stop thinking about and start doing.

The news next week

It’s a strange time. In a normal world, we would be preparing for a holiday and any economic indicators would be expected to be completely priced into the markets - fiat currency, equity, and cryptocurrency. 

Of course, it’s not, so we need to watch everything relevant. Here are some numbers we will be watching in the week ahead:

The author works exclusively for and has spent almost 20 years in trading rooms from New York & London to Düsseldorf & Sydney.

left mask img left light img