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September 12, 2018 | The End of Innocence

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.


Last Christmas, when we were still innocent and Bitcoin was testing $20,000, this pathetic blog was also prophetic. Bitcoin, we said, was the new dot-com. The end result would be the same.

So I get digital money. Who doesn’t? How many people still carry folding money, ever write a cheque or go to a physical bank? A dwindling number. In time, none. I also understand how moisters who have grown up taught to be afraid of stocks and realize they can’t afford real estate would be drawn to cryptos. In large part, they own this market. They constitute the millions of retail investors who have been pouring billions into Bitcoin and its clones on the faith that it’s the future. And in that, a huge parallel with the dot-com bubble of 18 years ago. We know how that ended, even though the underlying principle – that the whole world would go online – was totally valid.

So while cryptocurrencies have legs – the Bank of Canada is investigating creating one of its own and Bitcoin ETFs will soon appear – the current trading platforms and valuations could turn to dust before long. The sheep are doing predictable things – flocking to anything that promises rapid gains with renegade genes. The current story illustrating this is of the Long Island Tea Corp, whose stock jumped 289% when it renamed itself the Long Blockchain Corp. Hey kids, maybe you should Google

Like dot-coms with cool ideas, CEOs on skateboards and no profits, cryptos are not valued based on traditional metrics. Most investors wouldn’t know a blockchain if they fell over one. The market is completely driven by speculation. It’s gambling, not investing. The surprise which awaits the buyers when they decide to become sellers will be epic. As the financial professionals move in – and it’s happening – the kids will end up being someone’s lunch. The coolness and technological elegance of the underlying asset will not matter one whit. Early speculators are often rewarded. Later ones are always spanked.

Bitcoin, Litecoin, bitcoin cash, ethereum, ripple and whatever’s next may be new. Human nature is not. And the young must learn the same stuff over and again. It’s not different this time.

Nope, it’s not different. But it’s worse. While the tech-heavy Nasdaq shed a stunning 78% of its value as the Internet bubble burst in 2000, cryptocurrencies as a group have erased lost 80%.  And the losses aren’t over. Some of these puppies could go to zero.

The parallels are profound. Yes, blockchain is just as promising as the World Wide Web was almost two decades ago. A game-changing technology with a myriad of applications will undoubtedly alter the way so much is done, making it cheaper, more effective, secure and reliable. Just like online connectivity has come to connect your refrigerator and your car, or let Siri tell you what to wear.

But when it comes to investing, some things never change. Speculation, greed, ambition and bravado can easily propel assets beyond their intrinsic values. Combine that with endless, irresponsible and unregulated hype, plus investor naiveté and ignorance, and the die is cast. It was evident from the early days of the BTC explosion that cryptos would hurt a lot of people. Sadly, most of them are kids with no financial reserves. And billions in trades were put on credit cards. Ouch.

It was always clear regulators, central banks, organized financial markets and national governments would not allow alternative currencies to thrive. The intense volatility of cryptos has made them inherently useless as a medium of exchange, and events of the last year have shown they’re no storehouse of value. In short, worthless. But at least you learned something. Maybe.

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Markets are saying there’s a six-in-ten chance the cost of money will go up again next month. It would be the fifth increase in about a year for the Bank of Canada, and come despite the sucky job numbers delivered last last week.

Face it: the bankers have no choice. The current CB rate is negative – less than than inflation (at 3%). Our guys have raised rates four times while the Fed has pulled the trigger on seven occasions. We’re way behind the curve in terms of normalizing the cost of money from the historic lows hit after the GFC.

Soon we’ll be even further back as the Fed’s expected to lift its benchmark rate twice more before the end of the year, plus another two by the summer of 2019. Yes, blame Trump. The American economy is running hot thanks to his massive (and probably dangerous) corporate tax cut, serious deregulation, and a trade war that’s increasing inflation and goosing jobs.

So, we can resist cuts, watch the loonie flounder and import American inflation (without the growth), or keep gradually increasing rates. Markets are getting ready for the latter. You should, too.

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Silly us. We thought when the Toronto Real Estate Board resoundingly lost a seven-year legal battle to blind consumers to market stats (being shut down repeatedly by the courts and censored by the federal government) that it would capitulate. We all believed a new day of transparency was coming, that citizens would finally see beyond realtor claims and fibs and make their own informed decisions on price and value.

But, alas, no such deal. These guys refuse to die.

Zoocasa just received one  of those miserable cease-and-desist letters threatening to take away its access to MLS info if it continues to publish it, even in a password-protected state. TREB argues that after being spanked by the Supreme Court in August it has 60 days to prepare for the release of its data. And many lawyers.

Not. Holding, Breath.


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September 12th, 2018

Posted In: The Greater Fool

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