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iTrust Daily Insight

Edition 8.28.2019

Dear user (whether a consumer of our website, just a consumer of this research or an interested reader):

Going forward, we will hope to provide market data such as the above so that our commentary will have immediate context.

Today, as you can see, digital currency prices were generally down 4%-7%.  We believe this is most likely caused by very many factors but the factors we are seeking most earnestly include: 

  • are there any new regulations regarding Capital Controls from China? (we do not have any particular knowledge but we suspect there may be things “happening on the ground” because of the current trade spat with the US and because of continued news of US companies re-locating from China to Vietnam)
  • what is the technical (trading) impact from the IRS sending out letters to owners of digital currencies in the US?

All else equal, we would have thought that the dramatic political news coming from the UK over the past two days would have led to higher prices for digital currencies — Queen Elizabeth II of England approving PM Boris Johnson’s plan to suspend Parliament for 5 weeks until October 14 — just two weeks before the October 31 deadline by when the UK will depart from being a member of the EU, whether or not there is an agreement how to handle relations between the UK and EU after that date.  We would have thought, again, all else equal, that such dramatic news of future uncertainty would cause flight into assets like gold and digital currencies as a place to store wealth during the time of uncertainty.  Gold is acting as expected.  Price action in the Digital Currency space leads us to believe some other, technical, issue is dominating those markets currently.

Totally and completely separate from those real-world actions, one of the most famous Emerging Markets investors, Mark Mobius, has recently suggested to at least one television audience that investors hold 10% of their portfolios in physical gold.  

We suggest you watch the below video after reading this article.

But for context, we remind our readers that just in the US:

  • The original “Great Depression,” in 1897, was halted only by massive share-buying by one of America’s wealthiest-ever tycoons
  • The next big recession was only 10 years later, in 1907
  •  After pausing for the WWI years and then the boom (up) years during the 1920s, the next “Great Depression” lasted 12 years — from 1929 to 1941 — and included 25% unemployment
  • When OPEC was formed in the early 1970s and the US responded by fixing the price of gasoline which led to economy-destroying lines at gas stations, the US went into a deep recession
  • The same mistake occurred just a few years later in 1979
  • The 1991 recession was likely caused at least in large part by the uncertainty caused by Saddam Hussein’s take-over of Kuwait and the US’s subsequent liberation of Kuwait
  • The “boom years” of 1996-1999 ended horribly for tech investors with the “bursting of the Y2K bubble”
  • The terrorist attacks of Sept 11, 2001 tremendously exacerbated the recession which had already started as markets literally had to close as surviving personnel assessed damage and struggled to move on
  • The subsequent US property boom (up-swing in values) was caused directly by loose regulation at the Fed and other regulators as well as a very long period of very low interest rates, ending in the first time US home prices fell across the nation for the first time since the 1930s and to the failure of many global banks because they held US mortgage bond; their host governments were so small in comparison the IMF had to bail out, in very rapid succession, Iceland, Ireland, Portugal, Cypress and Greece and unemployment rates in Ireland, Spain and Greece all exceeded 25%
  • Rolling liquidity crises in France and the US finally led to the downfall of many financial institutions in the US including Lehman Brothers and AIG in 2008, which were so big and had so many counterparts that AIG was bailed out directly by entities backed by the US Treasury and Lehman Brothers’ bankruptcy led to further market disruptions for another 5 months (October 2008 to March 2009), causing the US unemployment rate to exceed 10%

 And that’s just in the US.

Through 1991, there had been well over 100 modern banking or currency crises.  Since then, there was the “Tequila Crisis” of 1994 in Mexico (and Latin America more broadly), numerous defaults by Argentina, an entire “Asian Debt Crisis” in 1997-1998 and a default of all its government debt by Russia in 1998.

We do not necessarily hold with Mr. Mobius the rationale that physical gold should be held because of the risk of expropriation by governments.  However, we do recognize that the concern and rationale he voices is rooted in lots and lots of historical precedent and that perhaps much of that historical precedent isn’t necessarily known or obvious to our readers or his viewers.

We believe there are many, many factors which drive all asset prices — including technical (short term, trading related), economic, fundamental, cyclical (1-5 year) and secular (10-30 year, such as the dramatically shrinking population of Japan or the very quick economic expansion of China).

Our hope here is to elucidate and generate a better crystallization of your own views, thoughts and opinions into your own actionable trading or holding actions.

We hope this contributed to your process.

Watch Video Now: https://www.bloomberg.com/news/videos/2019-08-20/mobius-should-be-buying-gold-on-any-level-video

Tim Shaler is Chief Economist of iTrust Capital.  He is a published Real Estate economist, was a portfolio manager and asset allocation expert at his previous firms and is an adjunct professor at Webster University. His MBA (Finance) and MA in Russian Economic History are both from the University of Chicago.

For all media inquiries, please contact Blake Skadron at b.skadron@itrustcapital.com

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