So, none of this makes sense anymore.
For a long time, offshore financing - which was predominantly priced off the LIBOR or overnight rates - had always been significantly lower than the benchmark rates in China. For years, raising offshore money at a lower cost had always been the de facto fundraise strategy. Today, it is obvious that the tables had turned, quite abruptly as well. After you account for taxes, hedging costs (which is somewhat upside down now) and geopolitical risk, raising offshore money in China doesn’t seem to make much sense at all, not at least in the near term.
While the rest of the world is hiking interest rates, China is going in the opposite direction, encouraging credit activity to boost growth and revive the economy. Earlier on, a consultation paper was also released, outlining guidelines towards formalising and further regulating the approval of offshore debt, on the pretext of promoting the healthy and orderly development of overseas financing by enterprises. Putting aside its over-leveraged property market and inflation in the rest of the world, it is almost as if the policy is indirectly encouraging Chinese companies to source for capital domestically rather than look elsewhere for financing.
The combination of all of the above, coupled with no end in sight of travel opening up, seems to hint that China is closing up from the rest of the world.
With the largest manufacturing engine closed from the world and the severe shortage of oil due to the war, you can hike all the rates you want but I don’t think that is going to meaningfully bring prices down.
"Let us say that you own a small airline company."
You are a very modern person; having attended many conferences and spoken to consultants, you believe that the traditional company is a thing of the past: everything can be organized through a web of contractors. It is more efficient to do so, you are certain.
Bob is a pilot with whom you have entered into a specific contract, in a well-defined drawn-out legal agreement, for precise flights, commitments made a long time in advance, which includes a penalty for nonperformance.
Bob supplies the co-pilot and an alternative pilot in case someone is sick. Tomorrow evening you will be operating a scheduled flight to Munich as part of an Oktoberfest special. The flight is full with motivated budget passengers, some of whom went on a preparatory diet; they have been waiting a whole year for this Gargantuan episode of beer, pretzels, and sausage in laughter-filled hangars.
Bob calls you at five P.M. to let you know that he and the copilot, well, they love you…but, you know, they will not fly the plane tomorrow. You know, they had an offer from a Saudi Arabian Sheikh, a devout man who wants to take a special party to Las Vegas, and needs Bob and his team to run the flight. The Sheikh and his retinue were impressed with Bob’s manners, the fact that Bob had never had a drop of alcohol in his life, his expertise in fermented yoghurt drinks, and told him that money was no object. The offer is so generous that it covers whatever penalty there is for a breach of a competing contract by Bob.
You kick yourself. There are plenty of lawyers on these Oktoberfest flights, and, worse, retired lawyers without hobbies who love to sue as a way to kill time, regardless of outcome.
Consider the chain reaction:
If your plane doesn’t take off, you will not have the equipment to bring the beer-fattened passengers back from Munich—and you will most certainly miss many round trips. Rerouting passengers is costly and not guaranteed. You make a few phone calls and it turns out that it is easier to find an academic economist with common sense than find another pilot—that is, an event of probability zero. You have all this equity in a firm that is now under severe financial threat. You are certain that you will go bust.
You start thinking: well, you know, if Bob were a slave, someone you own, you know, these kind of things would not be possible. Slave? But wait…what Bob just did isn’t something that employees who are in the business of being employees do! People who are employees for a living don’t behave so opportunistically. Contractors are exceedingly free; as risk-takers, they fear mostly the law. But employees have a reputation to protect. And they can be fired.
People you find in employment love the regularity of the payroll, with that special envelop on their desk the last day of the month, and without which they would act as a baby deprived of mother’s milk. You realize that had Bob been an employee rather than something that appeared to be cheaper, that contractor thing, then you wouldn’t be having so much trouble.
But employees are expensive. You have to pay them even when you’ve got nothing for them to do. You lose your flexibility. Talent for talent, they cost a lot more. Lovers of paychecks are lazy… but they would never let you down at times like these.
So employees exist because they have significant skin in the game—and the risk is shared with them, enough risk for it to be a deterrent and a penalty for acts of undependability, such as failing to show up on time.
You are buying dependability.
And dependability is a driver behind many transactions. People of some means have a country house—which is inefficient compared to hotels or rentals—because they want to make sure it is available if they decide they want to use it on a whim. There is a trader’s expression: “Never buy when you can rent the three Fs: what you Float, what you Fly, and what you…(that something else).” Yet many people own boats and planes and end up stuck with that something else.
True, a contractor has downside, a financial penalty that can be built into the contract, in addition to reputational costs. But consider that an employee will always have more risk.
And conditional on someone being an employee, such a person will be risk averse. By being employees they signal a certain type of domestication.
Someone who has been employed for a while is giving you strong evidence of submission.
Evidence of submission is displayed by the employee’s going through years depriving himself of his personal freedom for nine hours every day, his ritualistic and punctual arrival at an office, his denying himself his own schedule, and his not having beaten up anyone on the way back home after a bad day. He is an obedient, housebroken dog.
- from 'Hidden Asymmetries in Daily Life', Nassim Nicholas Taleb
To understand and decide whether bitcoin is a good store of value, consider real estate, commodities and other asset classes.
Real estate
About twenty years ago, I remember hearing folks talk about property being a good store of value, something that has that ability to stand the test of time. In some ways that is true. Real estate has not only been able to preserve capital (albeit somewhat illiquid) but is also an instrument that has proven to deliver returns through steady capital appreciation and/or rental income.
Within Asia, real estate has not only demonstrated resilience through the ups and downs, but also a beneficiary of domestic consumption and growth, buoyed partly by the prosperity of its regional economic titans: China, Japan, Korea, as well as Southeast Asia. A rising tide lifts all boats.
That still holds true to a certain extent today, although the returns are not as attractive. However, property is still pretty much the go-to choice for many investors flushed with cash and those in search of a relatively safe-haven especially during a recession.
Property - especially residential - survives particularly well during times of turbulence and economic downturn (at least in Asia). Rain or shine, the brick and mortar stands. People continue to trade and invest in real estate because fundamentally, they know that a roof over the head is a basic foundation of life based on Maslow's hierarchy of needs.
Residential property is also somewhat a good proxy to the overall global economic cycle. The more resilient the economy, the higher the value of the property.
Although the initial investment outlay can be high, it is also relatively liquid. And liquidity in valuation, is a metric that tends to be overlooked. In layman terms, this loosely translates to how easy it is for an asset to change hands. For example: You can list your second-hand car for a million dollars on Carousell, but at the end of the day, it's still worth nothing if it can't be sold.
The price of a share in a company is only as real as how much others are willing to pay for it, not how much you want to sell it for.
Furthermore, liquidity is also driven by the availability of buyers and sellers, and also shaped by the perception of the broader market.
Lab grown diamonds.
Consider:
A diamond is valuable only because people say it is, not because of its clarity or cut.
Jewelers and advertising companies around the world have done an extremely successful job in positioning the diamond at the apex of all precious stones. But the raw material for diamond is carbon - one of the most commonly available elements found on earth, ranked many times above gold, silver and platinum.
Yet despite being available in relatively large quantities, consumers continue to pay absurd amounts of money for a small rock mounted on a ring or co-joined in a necklace.
To add to the paradox, lab-grown diamonds are significantly cheaper than their natural counterparts, even though they share the exact same properties and make. In fact, according to this website:
"If you buy a lab-created diamond, you’d have a beautiful stone, yet no jeweler will buy it back."
So is Bitcoin a good store of value?
There's much talk of late about bitcoin being a store of value. I know very little about the world of bitcoin and cryptocurrencies - only limited to the banter that I read on Twitter and the news.
Is bitcoin a good store of value? Only time will tell.
Just like property, gold and other precious stones, it is considered a safe haven only as much as others see it. In this case, the devaluation (or eventual demise?) of the dollar is one of the key catalysts in the appreciation in value of bitcoin i.e.:
Investors buy bitcoin and other cryptocurrencies because they have lost faith in fiat currency.
And to take it to an extreme: They believe that the guy over the McDonald's counter will one day accept only a bitcoin-equivalent and reject cash as we know it today. Is that even imaginably possible?
While this may sounds absurd, for a billionaire or any large investor sitting on heaps of cash (a commodity that is increasingly being "devalued" due to the US government committed to printing even more money over the next few years), this implies an erosion of their financial position. Based on this, it seems:
Cash as we know it, is no longer king.
I think that crypto-exchanges were created largely because of this phenomenon.
These platforms are only viable and commercial if there is a sizeable market i.e. a significantly large pool of investors willing to seed the initiative and make the market.
This is similar to early stock exchanges. They serve to provide an avenue for companies to raise capital, but also functions as an alternative route for investors looking to 'diversify' or park their money somewhere where they can, and at some point of time in the future, re-distribute (by selling) them to other asset classes. Everyone else in the 0.001% of the liquidity pool makes the market — smaller funds, family offices, retail investors, sheep, etc.
Driving a paradigm shift in financial markets is big inertia.
If you have written code before, you'll understand how painful and tedious is it to do software development.
There's a reason why successive versions of Microsoft Windows in its early days were so slow and buggy. One can of course attribute it to processor speed and memory space (software blaming hardware), but the reality is that it's simply too lengthy and costly to eliminate the bugs by re-writing and building an entire operating system from scratch. Why demolish and re-build something when customers are willing to settle for a product with some occasional bugs and flaws?
Far easier it is to patch the errors than to re-invent the wheel.
So our financial system is not perfect: Benchmarking (or rigging) interest rates, opaque currency controls, money laundering, fraud, etc. But the reality is that the paper currency (since its inception a thousand years ago) still works as a medium for the exchange of goods and services.
To revamp today's highly complex financial system using bitcoin or any crypto-alternative would simply take too much work, several generations of change and monetary reforms, or even require a "reset" on an astronomical scale resulting in the total lost of faith in fiat currency, sending us all back to the barter economy.
Just as how asset values move in cycle with the economy, bitcoin will probably follow the same trajectory.
However little we belittle the value of cash, there are many commodities and asset classes out there which serve as good alternatives to what we define as a "store of value". Bitcoin is only but just one of them.