Is globalisation a “force for good”? In most of Asia, yes…
The war on globalisation is in full swing… at least, in the developed world. We talk a lot here about U.S. President Donald Trump’s “Fortress America”> READ MORE
The war on globalisation is in full swing… at least, in the developed world. We talk a lot here about U.S. President Donald Trump’s “Fortress America”> READ MORE
Photographic film giant Kodak was founded in September 1888. For most of the last century, it dominated the sector. The idea of a “Kodak moment” was one of the> READ MORE
From 2015 to 2016, US$1.7 trillion flowed out of China. That’s more than the entire economic output of South Korea. It’s as much as the entire economic output of> READ MORE
If you know anyone who spent some time in the United States in the 1970s and 1980s (or if you did), ask him or her about Life cereal, Mikey, and pop rocks. You may> READ MORE
The blockchain revolution is coming… And it’s going to fundamentally change how businesses operate. Make no mistake… this revolution is at least as> READ MORE
On October 18, China will kick off its 19th National Party Congress. That might sound boring… but for China watchers – and since China is the most important> READ MORE
Bitcoin is frequently compared to gold. But it’s not an either/or proposition… and I’ll tell you why. Indeed, gold and bitcoin are the only two widely> READ MORE
A little over four years ago, I was doing the rounds of the real estate scene in Xian, home of the famous Terracotta Army, and the ancient capital of China, located> READ MORE
The war on globalisation is in full swing… at least, in the developed world.
We talk a lot here about U.S. President Donald Trump’s “Fortress America” approach to global trade. Trump has led the U.S. into a sharp shift away from globalisation – for example, by promising to build a wall on the U.S./Mexico border and making it more difficult for people from certain countries that happen to be majority Muslim (while conveniently omitting from the black list those countries with which the Trump family has extensive business interests) to enter the U.S.
One of Trump’s first acts as president was to pull the U.S. out of the Trans-Pacific Partnership (TPP) – a 12-country deal that would encompass around 40 percent of total global output.
Trump called TPP “a terrible deal”.
Trump could also soon withdraw from the North America Free Trade Agreement (NAFTA) – the trade agreement between the U.S., Canada and Mexico. He’s called it “the worst trade deal in the history of the country.” It’s been the foundation of trade in North America for the past two decades, with two of the most important trade partners of the U.S.
And as we showed you recently, tensions between China and the U.S. are ramping up… which could lead to an all-out trade war.
Britain’s vote to exit the European Union similarly signaled a shift inward.
And throughout much of Europe, the rise of right-wing nationalist parties, who tend to equate globalisation and open trade with the refugee crisis and terrorism, is putting the unity of the European Union under pressure. In short, many developed, western countries view globalisation as a threat to their future.
But the sentiment is different in Asia…
While developed countries are shying away from globalisation, Asia is increasing regional and global ties.
For example, trade agreements such as the ASEAN Economic Community (AEC) are helping to bring the region together.
The AEC was designed to promote economic, political and cultural cooperation between the Association of Southeast Asian Nations (ASEAN) – which includes 10 member states. This agreement was founded on four pillars – creating a single market, creating an economically competitive region, ensuring fair economic development and integrating ASEAN into the global economy.
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The Asian Infrastructure Investment Bank (AIIB) was also launched in 2016, as a counterweight to the western-dominated IMF and World Bank. The AIIB has 77 countries as members including Russia, Australia and Brazil (but not the United States, which opposed its creation).
And sentiment around globalisation in Asia far outweighs western sentiment.
The graph below shows a country’s sentiment on globalisation and its GDP per capita growth.
As shown in the graph above, over 90 percent of respondents in Vietnam agree with the statement “globalisation is a force for good”. India and other big Asian economies including the Philippines, Indonesia and Thailand aren’t far behind, with over 70 percent of respondents agreeing with the statement. Hong Kong and Singapore aren’t far behind.
And although there are a lot of moving parts to an economy, it looks like there’s a correlation between sentiment towards globalisation and economic growth. The Philippines and Vietnam both saw GDP growth of almost 30 percent between 2011 and 2015. India’s was even more impressive… surpassing 30 percent over the same period.
Meanwhile, less than 50 percent of people in developed markets like France, the United Kingdom and Australia think that globalisation is a good thing. In the U.S. it’s closer to 40 percent. It’s not much better in Finland, Sweden or Germany… where fewer than 65 percent of people agree with the statement.
These developed economies have seen slower GDP growth over this period. Both Norway and Finland saw less than 5 percent growth between 2011 and 2015… while France, the U.S. and the UK all saw between 10 and 15 percent.
Now, I’m not saying that globalisation is driving all of the growth in developing markets. There are a lot of reasons these markets are growing faster than developed markets. (And some people would say that these markets are growing fast despite globalisation.)
For starters, developing markets are starting at a much lower base than developed, wealthy countries. It’s a lot easier to see 30 percent growth when your GDP per capita is US$5,000 than when it’s US$50,000. And as I wrote here, a youthful and fast-growing working age population – like in some fast-growing economies in Asia – can also drive economic growth. But globalisation certainly isn’t hurting.
As developed nations continue to turn inward, we’ll likely see developing countries embrace globalisation more and more.
For example, after the dissolution of the TPP at the hands of the U.S., at least two other proposed trade deals, the Regional Comprehensive Economic Partnership (RCEP) and the Free Trade Area of the Asia-Pacific (FTAAP), could help bind Asia more tightly together, as the continent’s economies move closer together.
China is taking the lead on these, as it makes big moves to take on the mantle of globalisation.
Through its One Belt One Road (OBOR) initiative – a massive US$4 trillion investment and development program – China is building infrastructure projects in 60 countries around the world. Soon, China will have strategic interests across huge swathes of Africa, Central Asia and Eastern Europe.
China sees the OBOR initiative as a means of announcing its place on the global stage, stepping into a leadership role that it sees the U.S. abandoning, and creating deep regional economic ties.
And it’s just one of the ways we’re seeing a slow but inexorable shift of the global political and economic centre, from west to east. (We’ve written more about this shift here.)
Publisher, Stansberry Churchouse Research
Photographic film giant Kodak was founded in September 1888. For most of the last century, it dominated the sector. The idea of a “Kodak moment” was one of the most memorable lines of advertising copy of all time, achieving the ultimate prize… entering our very lexicon (along with the verb “Google” and noun “Post-it” note).
Kodak co-founder George Eastman once said, “The world is moving, and a company that contents itself with present accomplishments soon falls behind.”
These were words by which he ran the company. He had given up on what was a successful dry-plate (which was used before film) business to initially embrace film and then moved to colour film (even though at the time it was inferior to black and white film)… a market segment that his company dominated.
In 1932, two years after Kodak was added to the Dow Jones Industrial Average index, Eastman took his own life. But the company he founded would thrive through much of the rest of the century, before finally succumbing to bankruptcy in 2013.
Kodak’s demise stemmed from the company’s decision to ignore digital photography, a technology that a Kodak engineer by the name of Steve Sasson invented in 1975.
Mr. Sasson later reflected on Kodak management’s attitude towards digital photography: “It was filmless photography, so management’s reaction was, ‘that’s cute – but don’t tell anyone about it.’”
In the early 1980s, Kodak explored digital photography and concluded that it had the potential to take over the traditional film business that Kodak dominated.
George Fisher, Kodak’s CEO from 1993 to 2000, said in a December 1999 interview that the company regarded digital photography as an enemy that would kill the chemical-based film and paper business from which Kodak had handsomely profited for so long.
Somewhat ominously, in 1999 Fisher said that “there are 117 dot-com companies out there who keep saying they’ll eat Kodak and Fuji up. It amazes me how many smart people believe such stupid statements.”
The contempt of large incumbents that enjoy a profitable status quo for new and potentially disruptive technology isn’t new.
But Kodak sprang to mind after catching the latest episode of the Larry and Jamie show…
At an Institute of International Finance conference in Washington last Friday, Larry Fink, the chairman and CEO of the world’s largest asset manager, BlackRock, said:
“Bitcoin just shows you how much demand for money laundering there is in the world… That’s all it is.”
One has to admire the chutzpah, if not the ignorance, of Fink. Clearly, he has either not read, or ignored, a report from the UK Treasury, released a full two years ago, that concluded:
“There are a limited number of case studies upon which any solid conclusions could be drawn that digital currencies are used for money laundering. There are concerns around anonymity, faster payments, and ability to provide cross border remittances and facilitate international trade. These issues are similar to issues identified with many other financial instruments, such as cash and e-money.”
Fellow financial master JP Morgan CEO Jamie Dimon was also on hand at the conference to weigh in once again on bitcoin (despite declaring he would no longer comment on it less than 48 hours earlier).
“But what is the use case for bitcoin? You’re in Venezuela, North Korea, you’re a criminal. Great product!” he said, apparently to fellow howls of derision from the finance masters in the audience.
Once again, what’s telling is not the ridicule of bitcoin, but the displays of what I can only call “crypto illiteracy”.
Anyone who claims bitcoin is a fraud or isn’t real simply doesn’t understand the cryptocurrency. As we’ve written before, bitcoin is simply a cryptographically secure medium of exchanging value.
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And as for the use case? Consider this…
My paycheck was nearly two weeks late this month, thanks to the inability of Asian banking giant DBS and global banking powerhouse HSBC to process a simple international bank transfer – despite having been able to with no problem the previous month.
A dozen emails, several irate phone calls, numerous escalations to supervisors and probably two dozen man-hours of work later, the transaction was complete.
The transaction could have been executed using bitcoin in minutes… (and mere seconds using other, faster processing crypto currencies)… but hey, fast, borderless payments is hardly a “use case” according to the CEO of a global mega-bank (who I can only presume still uses roll film).
Interestingly, Dimon’s Goldman Sachs counterpart, Goldman Sachs CEO Lloyd Blankfein, has reportedly stated that he hasn’t made up his mind about bitcoin yet.
This is probably a wiser stance to take. Goldman has long recognised the importance of technology. It’s why one-third (yes, 33 percent) of Goldman’s employees are involved in tech.
Now, if Fink and Dimon stood up and said they’ve personally summoned the brightest minds in crypto, done a deep-dive into the space, and their honest conclusion WAS that bitcoin and its ilk are all a complete waste of time, then I’d accept their opinion. I might respectfully disagree with their conclusion, but at least they would have informed themselves.
But that’s not what they did.
First, Dimon and Fink are probably terrified. Both are exceptionally clever men who head up some of the largest, richest and most powerful institutions in the world. They likely recognise that the banks of the future won’t be financial institutions – they’ll be technology companies. And these technology companies will be built on blockchain.
More importantly, these new banks will be built from the ground up in a way that simply won’t be possible by the likes of JP Morgan. It’s like a traditional bookseller thinking he can compete with Amazon just because he puts up a website selling his books online.
Second, it looks like Dimon and Fink are hoping that government regulation will save them. They’ve both focused on the illegality of bitcoin, of money laundering and in Jamie’s case, that governments simply won’t allow it… that they’ll shut it down.
Take a look at this quote from Dimon on bitcoin:
“It doesn’t have the standing of a government… a lot of it is being used for illicit purposes. And people who will get upset with it is governments. Governments put a huge amount of pressure on banks: know who your client is, did you do real reviews of that. Obviously it’s almost impossible to do with something like that.”
Dimon said this in January 2014… nearly four years ago.
Yet, last month, once again he said: “the bigger they get, the more governments are going to close them down”.
It would appear that Jamie is imploring the government and the regulators to step in. For an incumbent like JP Morgan or BlackRock, the best defence against their institutions possibly being usurped by blockchain-based technology upstarts is to frame the debate before it’s even begun. That means calling bitcoin a scam and a fraud, used only by money launderers and criminals.
(We’ll ignore for the time being the US$2 billion fine paid by JPMorgan for failure to report on suspicious activity from one of the biggest Ponzi schemes of all time, run by Bernie Madoff.)
With something as new and volatile as bitcoin and other crypto assets, healthy scepticism is your best friend. But be wary of blanket statements from seemingly ill-informed incumbents who stand to lose a lot should cryptos and blockchain fulfil even a fraction of their potential.
In the meantime, we maintain that investors looking to enter this asset class should start by owning and tucking away a small amount of bitcoin as a buy and hold investment.
From 2015 to 2016, US$1.7 trillion flowed out of China. That’s more than the entire economic output of South Korea. It’s as much as the entire economic output of the American state of New York. It’s nearly 25 times the fortune of Warren Buffett.
That’s a whole lot of money that’s left China. And if Chinese are taking their money out of China – why should you put your money into China?
As I reveal in the video below, this movement of cash out of China is actually government directed… and it could be good for Chinese companies – and investors – in the long term. It’s not a precursor of something dire – as a lot of the “talking heads” would have you think!
You can listen to my conversation with Tama about what’s actually going on below:
If you know anyone who spent some time in the United States in the 1970s and 1980s (or if you did), ask him or her about Life cereal, Mikey, and pop rocks.
You may get a look of bewilderment. Or, you may get a knowing chuckle and an “Oh yeah, what happened to him?”
To briefly explain… in a television commercial (back when everyone watched the same half-dozen TV channels), a cute boy named Mikey is urged to try a sugary breakfast cereal concoction called Life. To the amazement of the older doubting Thomases egging him on, Mikey approved of Life, spawning the catchphrase, “He likes it!”
Then – years later – the rumor surfaced that the actor who played Mikey had (after surviving Life cereal) eaten an bag of Pop Rocks candy, which were little candies that snapped and crackled on your tongue, chased by a can of Coca Cola. And, word was, little Mikey’s stomach exploded from the mixture of the two heavily carbonated substances. It was a story that had just the right mix of gossip, speculation and shock value to take on a life of its own.
Of course, it never happened. (Mikey grew up to become an ad executive.) But it was a good story, and one that destroyed the Pop Rocks industry. (You can read more about Mikey and what actually happened to him here.)
I bring up Mikey because the world of bitcoin is plagued by similiarly silly – and pernicious – rumors and misinformation. But while Mikey/Life cereal/Pop Rocks mythology was (mostly) harmless fun, bitcoin mistruths can cost you money… in the form of big opportunity cost.
The truth is, a lot of what you read about bitcoin and cryptocurrencies is simply wrong. I’ve seen articles in the likes of the Wall Street Journal that are factually incorrect. And now that the bitcoin price has soared above US$5,000 – the media seems determined to “warn” investors about the dangers of bitcoin.
(With Stansberry Research, we’re going to be holding a webinar on Wednesday night (US EST)/Thursday morning (Asia) that are going to be exploding some of those bitcoin myths… you can learn more about it here.)
So today, I’m debunking bitcoin’s biggest myths to set the record straight…
1. Bitcoin is not real money
The fundamental characteristics an asset must have to be considered money are:
Uniformity: In other words, every “dollar” or bitcoin is the same as the next one. When you’re talking about using seashells or cows as currency, uniformity is hard to achieve.
Divisibility: Dollars and bitcoin need to be divisible, broken up into small increments to cover a wide range of value transactions. Cows? Not so much, unless you’re hosting a barbecue.
Portability: Your currency must be easy to transfer and store.
Durability: Older, agriculturally-based forms of money had a shelf life. Gold is the ultimate when it comes to durability. Paper notes deteriorate.
Limited Supply: A currency is worthless if there’s no scarcity to it. In our office here in Hong Kong we have a 500 million dollar note issued by the Zimbabwean government – it’s a simple reminder of what ultimately happens when governments try to endlessly print their way to prosperity.
Acceptability: to be considered money, the asset has to be widely accepted. People all over the world will take U.S. dollars. They won’t however take Turkish lira.
Bitcoin holds all of these characteristics with the exception of acceptability – although that is rapidly changing. Japan passed a law earlier this year that made bitcoin acceptable as legal tender.
And the digital element of bitcoin? Well, more than 90 percent of all money that exists today around the world is not even physical… it’s purely digital, existing only on computer servers.
2. Bitcoin can be hacked
In certain circles, bitcoin and cryptocurrencies in general are synonymous with hacking – thanks to some high-profile hacks of cryptocurrency exchanges – like Mt. Gox in 2014 or Bithumb in 2017.
In an area so nascent, of course there are hackers looking to exploit individuals’ inexperience, or find technological loopholes. Hackers have always and will always be a risk to ANYTHING where value resides on a computer network.
But bitcoin is one of the most secure assets an individual can own – it’s just that it’s 100 percent up to the individual to secure it themselves.
Cryptocurrency exchanges have been hacked. They are third-party platforms where you have no visibility as to how customers’ digital assets are being secured. That’s why I’ve said repeatedly that you shouldn’t keep large amounts of bitcoin on an exchange because when it’s on an exchange you don’t own it, they do.
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And when it comes to hacking, you are far, far more at risk from other cybersecurity vulnerabilities – just look at U.S. credit reporting agency Equifax who announced recently that the Social Security numbers along with other personal information of millions of Americans may have been compromised.
That’s a catastrophic breach. And this kind of thing happens all the time. So there’s no use worrying about bitcoin “hacking” when you can take full personal control and accountability for securing it yourself (rather than be at the mercy of an incompetent third party).
3. Bitcoin is used by criminals
“Bitcoin’s core use remains what’s it’s always been: paying for drugs or extortion fees on the Internet.”
That’s a quote from a recent Fortune magazine article.
The suggestion that bitcoin’s core use is for buying drugs and extortion is nothing new – and it’s part of the media’s ongoing narrative. It’s understandable in many respects.
After all, there have been recent ransomware hack/virus attacks that demand users pay a small ransom in bitcoin to unlock their computers.
And who can forget the FBI’s 2013 takedown of Silk Road.
Silk Road was an online marketplace used to sell illegal drugs, dirty pictures, and stolen plastic.
These criminals thought that because bitcoin operated independently of the U.S. government, their activity couldn’t be traced.
But they were proved wrong once the government shut Silk Road down, and made an example of this illegal marketplace.
You see, it turns out bitcoin is nowhere near as anonymous and untraceable as cash.
Bitcoin is pseudonymous. That is to say, a bitcoin address can be tied to a particular user. You may not know who that user is, but that user has an identity. Think of it like a username on a website. You may not know who’s behind it, but that username is tied to a particular person – and their actions are tied to that username.
The whole point about bitcoin is that it’s actually transparent. Every transaction is recorded on the blockchain and visible to everyone.
In short, just because bitcoin has been the method of payment used by some criminals, it’s definitely not the currency’s core use.
4. Bitcoin is not regulated
A lot of people are worried about bitcoin because the government hasn’t come out with an official policy about how it should be run.
In short, there’s no financial system, like the U.S. Federal Reserve, manging its existence and value. And as a recent Forbes article “warns”, “there is no ‘good faith and credit’ of the government standing behind the currency.”
But think about it… does a government’s promise that something is “money” protect its value?
The U.S. dollar can be printed at will… and only has value because the government says so.
Plus, more regulation on bitcoin is quickly being established. For example, the U.S. Commodity Futures Trading Commission (CFTC), which regulates futures and options markets, already approved the creation of options trading around bitcoin.
And the SEC recently came out with a statement hinting that it will soon begin regulating cryptocurrencies.
These moves will only bring additional stability to the bitcoin market, and with it, some new money.
But what about in the rest of the world?
China recently announced a ban on initial coin offerings (ICOs), where companies create and issue cryptocurrencies to the public in exchange for bitcoin or ethereum (the second-largest cryptocurrency).
But China didn’t “ban” bitcoin. And even if a government did want to ban it, the question is “how”? That cat’s already out of the bag. And bitcoin doesn’t answer to any government.
There is no bitcoin head office, no CEO, no board of directors.
What’s more, there’s no incentive for any major economy to “ban” bitcoin. (Japan, the third-largest economy in the world, made it legal tender.) Any government that does ban it is simply saying “we don’t want innovation, technology jobs, new companies, or enterprise in general”.
Now don’t get me wrong – there is and will be regulation, and there may even be a temporary shutdown of the exchanges.
But regulation is a different story altogether. For example, don’t think for a second that Uncle Sam is going to let you make 10x on a cryptocurrency trade and not pay your “fair share” of tax to the coffers.
5. Bitcoin is too volatile to invest in
Most people look at bitcoin’s daily price changes and write bitcoin off simply because it’s more volatile than your typical blue-chip stock. But these swings are growing smaller, as more and more people move money into bitcoin.
According to investment firm ARK Invest, at the beginning of this year, “bitcoin’s daily volatility was about one-fifth that of five years ago, and 28 percent less than January 1, 2016.”
And this trend should continue, as time goes on… and more money flocks into this sapce.
That said, even with this level of volatility, bitcoin delivered better risk-adjusted returns than stocks, bonds, gold and real estate over the past five years. In fact, over the past year alone, bitcoin performed twice as well as stocks, on a risk-adjusted basis.
I’m not saying bitcoin won’t be volatile. Like any asset, cryptocurrencies will continue to experience rallies and corrections. Don’t fall into the trap of thinking “this time is different” and that bitcoin will go up forever. The cryptocurrency could absolutely be in for a short-term price bubble. But over the long term, the upside is far from over. You just need to proceed carefully. And “invest” no more than you can absolutely afford to lose.
Don’t believe the media hype
As I said earlier, the media doesn’t really understand bitcoin. So what you read in the mainstream media on cryptocurrencies should be taken with a liberal dose of salt.
The truth is, bitcoin is a just a cryptographically scarce and secure medium of exchanging value. It’s not a vehicle for criminals or not a real currency. And bitcoin, and the technology behind it – called the blockchain – is quickly changing the world. And it’s here to stay. Being on the outside (and not understanding it) will limit your ability to profit.
So if you’re not familiar with it, now is the time to make the effort.
If you’re ready to get started with cryptocurrencies and blockhain, we’re be teaming up Stansberry Research for their first-ever bitcoin webinar.
During this event, you’ll hear us talking about bitcoin and cryptos in depth – how it’s changing the world faster than you could possibly imagine, and how you should think about it from an investment perspective.
It will be streamed – LIVE – from the U.S, beginning at 8AM Singapore/Hong Kong time on October 19. (That’s October 18, 8PM on the east coast of the U.S… or midnight GMT).
You don’t want to miss it.
The blockchain revolution is coming…
And it’s going to fundamentally change how businesses operate.
Make no mistake… this revolution is at least as significant as the one brought about by the Internet. It will disrupt every single business on the face of the earth.
That’s why it’s vital that you learn to understand this technology. It will offer countless investing opportunities in the years ahead… and it will play a central role in future years in how you (and, without question, your children) work, do business, play, and operate in society.
I know that sounds like a lot. But bear with me as I explain a bit…
(And, if you want to hear from two of the world’s blockchain experts about how this is going to happen – and how to invest in it – sign up for our live webinar (it’s on Wednesday night in the U.S. and Thursday morning in Asia.))
“Blockchain” is one of those words that has the power to confuse even the smartest people. And the media is completely clueless about how this technology actually works.
For starters, blockchain is the technology behind cryptocurrencies like bitcoin.
The Bitcoin blockchain allows us to transfer the bitcoin currency person to person without any intermediary. When I transfer U.S. dollars to you, we either have to do it in person – with me handing you cash – or through the banking system, which involves me telling my bank to send money to your bank account.
(Bitcoin with a capital “B” refers to the blockchain, whereas bitcoin with a lowercase “b” refers to the cryptocurrency.)
But how does this actually work?
Think of the Bitcoin blockchain as a giant Excel spreadsheet that shows the complete transaction history and location of every bitcoin.
Every 10 minutes the spreadsheet gets updated as an additional “block” of new transactions is added to the spreadsheet.
Everyone can have their own copy of the spreadsheet. It’s completely transparent.
Let’s say Jim sends 1 bitcoin to Sally. When the transaction is processed by the blockchain, the spreadsheet is updated. Jim’s balance is decreased by a bitcoin, and Sally’s is credited one.
But who updates the spreadsheet? And how do we stop people from trying to make false updates to the spreadsheet, awarding themselves more bitcoin, or trying to send the same bitcoin to two different people at the same time?
That’s the job of what are called nodes, which are also known as miners. Nodes are the computers or large computer systems that support the Bitcoin network and keep it running smoothly. Nodes are run by individuals or groups of people who contribute money towards buying powerful computer systems, known as mining rigs.
There are two types of nodes, full nodes and lightweight nodes.
Full nodes keep a complete copy of the blockchain (i.e., the giant Excel spreadsheet). This is a record of every single transaction that has ever occurred. This is currently around 150 gigabytes in size. (For reference, the largest USB thumb drives usually max out at about 128 gigabytes.)
Lightweight nodes, on the other hand, only download a fraction of the blockchain. Lightweight nodes are used by most folks for bitcoin transactions. A lightweight node will communicate to a full node when it wants to transact.
So the full nodes (or miners) run the spreadsheet, but how do they keep the spreadsheet synchronised between them all? This is the key, considering there’s no limit to the number of people who can run their own full node.
Let’s go back to Jim and Sally. Jim wants to send 1 bitcoin to Sally.
Sally creates a bitcoin wallet. Anyone can create a bitcoin wallet in a couple of minutes (we wrote a complimentary report outlining how to do this, which you can access by clicking here). When you create your wallet, there are two pieces of information created for you:
Sally tells Jim her public key. Jim opens his bitcoin wallet, puts in the instruction to send 1 bitcoin to Sally’s public address, enters in his private key (password) to authorise the transaction and hits send.
After a few minutes, Sally checks her wallet again, and sees she now has a bitcoin in her wallet. But what’s happening behind the scenes?
First, the network (in this case a lightweight node) makes a quick check of the proposed transaction. It checks to see that Jim has enough bitcoin in his account. And it checks if the address Sally provided is a valid bitcoin address.
After the transaction passes those two tests, the transaction gets bundled together with other pending transactions into a “block”.
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Go here for details.
That block then goes to the miners. The goal of the miners is to verify the block, and add it to the blockchain (i.e., update the spreadsheet).
How does a miner get to add a block to the blockchain? This is where brute force mining comes into play.
To understand this, we need to touch upon hashes.
A hash value is a series of numbers and letters strung together that looks something like this: 1gwv7fpx97hmavc6inruz36j5h2kfi803jnhg.
A hash value is generated by pushing data through a mathematical formula called a hash function.
Another way to think of this is like the ingredients for a smoothie and a blender.
You take your ingredients (your data), put it through a blender (the hash function) and you get your smoothie (the hash value).
Hashing is a one-way process. When you give me a hash value, I can’t turn it back into its original input data, in the same way I can’t turn my smoothie back into its original ingredients.
When miners are given a block of transactions to try and add to the blockchain, they are using a hash function to try and solve a cryptographic puzzle.
The miners take the new block with all the transactions in it, combine it with a randomly generated number string (called a nonce), put it through a hash function and then get a particular hash value.
What a miner is trying to do is find a hash value that starts with a specific number of 0s. They will keep trying different nonces until they get the necessary hash value.
This trial and error computation is shown in Step 1 and Step 2 in the diagram below.
All the miners are in a race to find the correct hash value. This is because the miner who finds it (Step 3) will broadcast the correct solution to the network (Step 4), who will verify it is correct.
The new block then gets added to the blockchain (Step 5), and the winning miner gets awarded 12 bitcoin by the blockchain for his success. This is worth around US$55,000 in today’s prices.
Sally’s bitcoin transaction is now recorded in the blockchain. Sally’s bitcoin wallet is now credited a bitcoin, and Jim’s is debited one.
The mining process then starts over again, with a whole new bunch of transactions bundled into a new block, and the miners all compete again to find the correct hash value.
In the media, bitcoin tends to hog the headlines when it comes to cryptocurrencies. But Bitcoin itself is just the proof of concept for blockchain. Bitcoin’s success has shown the world it is possible for independent and fragmented entities (miners) to enable strangers to exchange value with no need for an intermediary. And it can be done in a completely transparent, verifiable and open way.
As email is one use case for the Internet, so too is bitcoin a single use case for blockchain. There will be countless uses for blockchain in the future… from contracts that don’t require any intermediary to creating completely decentralised businesses built on blockchains. And there are countless opportunities for investors.
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On October 18, China will kick off its 19th National Party Congress. That might sound boring… but for China watchers – and since China is the most important country in the continent that’s the engine of the global economy, pretty much everyone should be watching China – it’s like a state fair, a political nomination convention, Comic-Con festival and Golden Week all rolled into one.
That’s because this twice-a-decade Communist Party meeting will determine China’s top leadership for the next five years. And in an economy that is still heavily influenced by the state, the priorities and approach of the guy (and it’s always a guy) at the top is hugely important.
For investors, the Chinese government’s plans can be a blueprint for where to focus your attention – and cash. I’ve often heard Peter say that when the Chinese government makes up its mind to do something (whether it’s building massive new infrastructure projects or hosting the Olympics), it gets done. And, as investors, we can make money by knowing what the government says it plans to do, and getting in front of that wall of money.
And let’s not forget… with a GDP of US$11.2 trillion, China is already the world’s second-largest economy (it will soon be the largest), and the second-largest stock market. The country will also soon have the world’s largest middle class with over 550 million people by 2022. To put this in perspective: That’s 1.7 times the entire population of the U.S.
China is also becoming a leader in globalisation as the U.S. turns inward. Through its One Belt One Road (OBOR) initiative, China is developing infrastructure across 60 countries. So China will soon have strategic interests across a huge swathe of Africa, Central Asia and Eastern Europe.
So what happens in China matters – a lot – to the global economy, and to investors everywhere.
President Xi Jinping and Premier Li Keqiang are expected to stay on for their second terms. But at least 11 of the 25 members of the Politburo (see below) could retire due to their ages. And five of the current seven members of the Politburo Standing Committee could retire.
The Politburo oversees the Communist Party. But the real power remains with the senior members of the Politburo Standing Committee. This committee conducts policy discussions and makes decisions on major issues when the Politburo is not in session. In short, the Politburo Standing Committee is the most powerful decision-making body in China.
The Standing Committee used to be nine people – but under Xi it has only been seven. The positive is that it focuses decision making and the ability to get things done. The negative is that it concentrates power in too few hands, leading to less diversity of thinking.
And it’s widely expected that Xi will seize this opportunity to promote his allies into Politburo and Politburo Standing Committee positions. This will consolidate Xi’s power, and allow him to more easily implement his long-term strategies and reforms. (But too much power in too few hands – in any political system – can be dangerous. It also doesn’t promote new or different ideas.)
So what are Xi’s long-term plans? He’ll likely focus on three main things.
Xi’s overall objective is to maintain “stability” – this covers just about everything – stable economy, currency, financial markets, the banking system and social conditions.
Many analysts believe Xi will focus on China’s systemic financial risks and facilitating China’s transition from a manufacturing to a services economy.
In an effort to keep economic growth up over the past few years, China has taken on a lot of debt. Since 2007, it’s estimated that China has added US$24 trillion in debt at all levels. For comparison, that’s more than the U.S. government’s total debt of around US$20 trillion. (This is a lot… but it’s not going to sink China’s economy, as Peter explains here.)
And note that this is China’s TOTAL debt – public, corporate and household. The U.S. figure is PUBLIC debt… so comparing the two is not comparing apples with apples.
Still, Xi’s primary objective will be to rein in debt by local governments and loss-making state-owned enterprises (SOEs). Reducing the country’s target economic growth rate, below 6.5 percent – which is still astonishingly high for an economy the size of China’s – should also help reduce debt, as the pressure to generate growth has helped fuel the debt load.
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We will also see a slow but continuing reform of SOEs, with many smokestack SOEs being closed, merged or wound down… in industries like coal, power, steel, aluminium and cement.
And to help the transition to a more sophisticated economy, Xi will also likely funnel money into the advanced manufacturing, technology and agriculture sectors… while moving resources out of the coal and steel sectors, and other “old economy” segments.
In short, we might see China’s economy continue to slow down in the years ahead (which is in any case a mathematical certainty). In the meantime, investment in China’s advanced manufacturing, technology and agriculture companies could ramp up.
(Part of the puzzle is to figure out who benefits as China leaves behind some industries and focuses on others. One example is in ready-made garments (that is, clothing), where China is by far the world’s largest producer. As labour costs have risen in China, other countries – with lower labour costs – have picked up the slack… like China’s neighbour Bangladesh, which is the world’s second-largest producer of garments. I went there last week to learn more about this incredibly dynamic economy that is practically invisible to the investing world.)
The next item on Xi’s agenda will be focusing on advancing structural reforms in social welfare and economic rebalancing.
Political risk consultancy Eurasia Group (where I used to work) thinks that during his next term, Xi will push policies on healthcare reform, pension reform, fiscal reform (such as tax collection) hukou reform (China’s governmental household registration system), poverty alleviation and other initiatives that help the social safety net.
These reforms should help China’s urbanisation efforts, and also support growing consumer demand.
Xi could also push through reforms to create more transparent capital markets, streamline business approval procedures and lower fees and taxes.
And he could open sectors like financial services and health care to private domestic and foreign capital. This would help Chinese companies access capital and technology. And exposing these sectors to competition could help boost productivity and efficiency.
On a related front, the environment is also a critical issue for China’s policymakers. Pollution isn’t only a question of health – it’s also a political priority.
Finally, Xi will likely double down on promoting a strong role for SOEs. Xi has long considered SOEs as “national champions” that advance political objectives. So he’s unlikely to reduce the role of these enterprises. That means that SOEs in the telecommunications, oil and gas, power generation, transportation, railways and nuclear power sectors will continue to benefit from strong domestic positions – and from state-promoted investment through the OBOR initiative.
However, Xi may try to inject private capital into these businesses without ceding state control. And not all SOEs will continue to receive state support. “Zombie” enterprises in the mining, auto, textile, chemicals, cement and steel sectors will continue to have their lifelines slowly removed. The idea is to cut production and make the survivors more efficient and more market oriented.
To sum up, we can expect China to aim, above all, to maintain stability. It’s going to focus on managing its debt – while continuing its transition to a services economy – with social and fiscal reforms in the years ahead. This should lower the risks of China seeing a recession. It also means China will continue to invest in its SOEs and infrastructure and technology sectors.
Publisher, Stansberry Churchouse Research
Bitcoin is frequently compared to gold. But it’s not an either/or proposition… and I’ll tell you why.
Indeed, gold and bitcoin are the only two widely distributed, decentralised methods of exchanging value as currency. There is no central authority issuance like there is with U.S. dollars or any other fiat currency.
Likewise, neither bitcoin nor gold can just be “printed” at the push of a button by an anxious central banker. You have to either earn your gold by mining it – which is also what you do to get bitcoin, but with computers instead of picks and shovels – or you can pay cash for it. But there’s one big difference between the two…
Gold is a physical, tangible and real asset.
You can pick it up and feel its satisfying weight in your hand. It can’t be altered. Gold is gold. Once I own it, that’s it. I don’t need to rely on a functioning internet. I don’t need a computer. It’s pure, tangible value.
And gold has unquestionably been money for thousands of years. A gold coin can still sit in my pocket, even while I might be fending off mobs, zombies, nuclear winter or hordes of cockroaches.
On the other hand, bitcoin is nothing more than a code that exists somewhere on the internet. You can’t pick it up and put it in your pocket. If you lose that code… you lose your bitcoin.
Bitcoin isn’t easy to explain to the average guy on the street. The fundamentals of blockchain, and the distributed ledger systems upon which bitcoin is built, are not straightforward. It usually takes time and effort for people to really understand just how much of an innovation bitcoin really is when it is a trustless mechanism for exchanging value. Most people simply can’t comprehend bitcoin and the blockchain.
As a guy on a cryptocurrency email thread I was on succinctly put it:
“I prefer a currency that has survived 5,000+ years of wars, empires, the rise and fall of countries, cold spells, hot spells, and has been universally accepted in every country of the world.”
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No matter how big bitcoin gets, it will never be gold.
If you were to ask me which I think is more likely to be around a hundred years from now, it’s gold… every time. Nothing has usurped it for millennia as a globally accepted medium of exchange or store of value, and I don’t think bitcoin will do so either.
Bitcoin is the ultimate in freedom of asset ownership. The government can’t confiscate it from you, as it did from owners of gold in 1933 in the U.S. under Executive Order 6102.
You can cross national borders with bitcoin in your possession on a USB-stick device, a piece of paper… or if you can memorise your private key, with no physical object in your possession of any kind.
Whether your bitcoin is worth US$100 or US$100 million, it makes no difference to how you move and store it (which is clearly not the same with gold). You don’t need a trusted middleman to send it, and you can move it around the world, securely, in a matter of minutes.
And if you’re looking for gains… bitcoin is a lot likelier than gold to be up 1,000 percent three years from now. Even though its price has soared over the past few years, it’s still nowhere near mainstream yet.
So gold and bitcoin both deserve a place in your portfolio.
Gold has stood the test of time and is a medium of storing value. Bitcoin’s time, on the other hand, is just beginning. Blockchain is the future, and when you have an opportunity to buy the future and tuck it away, you should take it.
A little over four years ago, I was doing the rounds of the real estate scene in Xian, home of the famous Terracotta Army, and the ancient capital of China, located in present-day Shaanxi Province. We were visiting a few housing and commercial projects and checking on the mood of the market (looking at things like prices and sales volumes). Xian is a Tier 2 city (generally defined as cities in China with roughly 3 to 15 million people), with a population of around 8 million (about the same size as London or New York). Having checked out a low-rise completed development on one side of the city, we drove through the centre to another development under construction on the other edge of town.
Development in Xian at the time was in full flow. There were cranes everywhere. The city’s development had lagged behind the country’s Tier 1 cities and many of the Tier 2 cities as well. Xian was now catching up with a vengeance. I casually started counting cranes. It wasn’t easy given the number of them. But I ran out of steam at a little over 200 cranes during the 30-minute ride across town. Moreover, we had travelled east/west across the middle of the city, and had not ventured into the suburbs, where I am sure the crane count continued. Nor had we done a north/south crossing of the city.
Given that each crane probably meant one high-rise apartment block, the inescapable conclusion was that there was an awful lot of building going on. Yes, the city had lagged behind in the development stakes, but I hadn’t seen this scale of building before.
It was clear to me that Xian was about to experience a massive oversupply of property that would pressure the market for years. Well, that was partially correct. It did produce a substantial oversupply and an overhang of unsold property inventory equivalent to more than 22 months of average monthly sales. That kind of overhang could be expected to cause price declines and take a very long time to absorb. For a couple of years, policy concerns centered around how to get inventory down and avoid financial problems in the local banks and other financial institutions.
Fast forward to mid-2016, and property prices in Xian had not moved much. There had been no crash, despite the big overhang. But unsold inventory was down substantially to almost “normal” levels of around 14 months of average sales.
Scroll forward to August 2017 and we see a totally different picture again… one that looks more like a property bubble than the supply-induced meltdown that I had been fearing earlier. In the year to end of August, average home prices in Xian have soared by 66 percent to around US$1,670 per square metre (US$155 per square foot) according to real estate data provider and consultancy China Real Estate Information Corp.
Xian is a typical example of how quickly real estate markets in China can go from huge oversupply to bubble conditions. We have seen this happen on numerous occasions in many cities.
So after policy prescriptions that were focused on absorbing excess supply and preventing financial distress associated with excess real estate inventory, local policymakers in Xian are now focused on curbing a massive housing bubble… all in the space of less than three years.
The city has tightened controls on the property market four times in the past nine months in an effort to rein in skyrocketing housing prices. Xian has joined many other Tier 2 cities that have seen property prices soar as they did earlier in the bigger Tier 1 cities.
The controls include:
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If experience of other bouts of tightening in recent years and experience of other cities in this recent cycle are anything to go by, Xian will see some slowing of the pace of sales, and the pace of price increases will slow. But whether prices will go into reverse, and actually fall in the coming year, is less than certain. This has not happened in other cities in the past year or so where tightening has occurred.
Investors may have noticed that China’s housing market has gone through three cycles since the Global Financial Crisis in 2008. The current cycle is peaking (and has already peaked in some cities). In recent cycles, any downside on an annual basis has been very modest… no more than a few percentage points.
China’s policymakers are constantly tweaking the real estate markets at both the national and local levels. They ease the reins if things are slowing down, and apply the brakes when the pace is getting too fast. Policy setting is more focused on the latter today across most of the larger Tier 1 and Tier 2 cities. The objective is not to generate a big tumble in the market, but to dampen enthusiasm that might pose risks to banks and also housing affordability.
The measures are working. For the top 26 cities in China, the year-on-year pace of sales of new housing is down around 20 percent from a year ago. For Tier 1 cities, prices have flattened out but are still moving up at this point in Tier 2 and 3 cities. Prices in smaller cities have lagged way behind the moves in the big Tier 1 cities in the past two years.
Most of the big picture demand and supply indicators for the housing market are looking OK:
These figures show that the supply overhang that worried investors and policymakers back in 2013 has been reduced… and will likely stay low (or fall even lower). The pace of investment in real estate has slowed, and for that reason there will be fewer starts and a lower supply of new units.
There are good reasons to stay invested in the big Chinese property companies listed in Hong Kong.
They are consolidators in a very fragmented industry. Many are absorbing companies and projects held by less well-financed players. For example, one company I am closely involved with acquired eight projects via this route in the first half of this year. The top ten listed property companies now have about 28 percent market share compared with about 20 percent a year ago, and about 14 percent five or six years ago. This could go to around 35 percent by 2019.
These top companies will post sales growth in the region of 30 percent on average in 2017. Compound annual net profit growth in the three years to the end of 2019 is likely to be around 25 percent, and could be higher. Visibility of 2018 earnings is good.
Stocks have rallied from historically low valuations of around 4-5 times forward earnings to around 7.5 times forward earnings today. They are cheap against their global peers, which trade at around 16 times forward earnings. Return on equity (at 13.5 percent) is almost twice the global average. And these stocks will give investors a very respectable 4.5 percent dividend yield versus about 2.5 percent globally.
Gearing has been a concern in Chinese companies. The average net gearing for Chinese property companies is around 70 percent versus about 68 percent globally.
I also like that many of these companies are growing their investment property portfolios strongly, which should produce reliable and steady long-term rental income. Government policy is encouraging property companies to build more housing for long-term rental to meet the demand from those who do not want to own their own homes, or cannot afford to do so.
The long and short of this? Stay invested in China’s property sector via Hong Kong-listed companies.
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