TwoCitiesCapital

Gold has a fixed supply that's above ground and new supply added each year from additional mining. That ratio is called stock-to-flow. In general it's about 70x (i.em there is 70x more gold above ground than added in new supply meaning new supply is only slightly inflationary). Many people consider this ratio important in describing general scarcity and relative value of commodities. Why is gold capitalized as more valuable than silver and platinum? It's stock-to-flow ratio is significantly higher. New supply is significantly more scarce. BTCs stock to flow is currently ~55x. At the next halving, it'll be ~110-120x. Significantly more scarce than gold on a relative basis and significantly less inflationary. At some point, annual supply basically drops to 0 and BTC becomes deflationary as people will still occasionally lose coins. Who is buying it? I've already covered sources in a prior post from yesterday. People are buying it for use in payments, people are buying it as a differentiated asset class, people are buying it for a balance sheet store of wealth given it's relative scarcity, Russia is considering it's use in global trade to avoid USD sanctions, central banks might be considering it as an alternative to gold and USD assets now that CB bank reserves have been weaponized, etc. Lots of use cases - some good and some bad. That network of people is generally growing every year and this demand for the coin is growing every year while new supply slows. Why is BTC going to outperform the S&P? Over what time frame? 10-years? 20-years? Because it's in a secular growth trend of growing demand and decreasing new supply making it highly inelastic. Price moves are explosive as we've seen time and time again. BTC could go to $1 million tomorrow and the number of new BTC issued in supply doesn't change. The only way to incentivize additional supply coming to market is paying a high enough price to convince someone to sell. 70+% of BTC in circulation hasn't moved in over a year - there aren't many sellers in these desperate times, how many do you expect when times are good and they're being rewarded for holding? Eventually BTC will trade at a significantly higher enough capitalization that forward returns will be pretty minimal as holding a currency should be. That point doesn't occur until mass adoption has happened which we're only seeing the beginning of. Lots and lots of new market participants have come around to accepting BTC since 2018 and I believe more will come around. Supply and demand. And yet over 3-year, 5-year, and 10-year periods BTC is trouncing the dollar despite being down 80% while the dollar is at 20-year highs? Which one was the real store of value over the intermediate-to-long term? Would also add last time BTC boomed was in 2017...when interest rates were rising. The top coincided with rising interest rates this time around. Interest rates didn't matter to it in 2016/2017. And interest rates weren't moving in 2013 when it had the prior bust. Pretty sure we can say historically over the 3 boom/bust cycles that there is ZERO correlation to interest rates.

Bitcoin is disinflationary/deflationary by design. No currency/store of value on that chart is so comparing to historical returns for currencies and commodities will be misleading. As to why to own it, the same reason you'd own any commodity. Demand is expected to outstrip supply - most of bulls think long term BTC adoption will continue while available supply slows be design. This is an entirely inelastic asset class which results in massive swings in price given that inelasticity. Historically those books have lead to higher highs and the busts to higher lows because this is a secular growth trend and not a bubble. Nobody is telling you to own it instead of an ETF. I'm not in the business of single asset allocations - I own a ton of stocks. I also have a ton of exposure to real estate via my home. And now I have a ton of exposure to crypto too.

Agreed you don't have to invest in everything. It wasn't a knock against Buffet's track record - just his understanding of tech. The very fact he was so close to Gates and STILL missed investing in Microsoft is even more damning than anything I said if I'm being honest.

1) is as good of question as any. My general guess would be hubris and ignorance as they obviously don't feel threatened by it. Let me ask you a question in return, of all the prior reserve currencies that failed, which were the ones the government "let" power be taken away? 2) you've obviously never heard anyone talk about the lightning network which was developed specifically for this application, or El Salvador adopting it as a currency specifically for this application, or Square allowing any payments/receipt to be processed in BTC specifically for this application. So the premise of your question is wrong - plenty of people are talking about this, and developing solutions to do this, and using it. But why not more? Good money drives out bad - I'd rather spend my USD first.

Those materials produce no cash flows, thus by his definition are of no value. They're simply inputs into a house. The house COULd produce cash flows, but doesn't (actual a net cash drag with the mortgage). So it's of negative value to me or to anyone who buys it as a primary residence? Or is it only worth it's option value of those projects? The other thing are POSSIBLE but not probable. To do them you'd need to buy the majority of the units in the building, vote to sell the building, vote to abolish the HOA, kick everyone else out, and then demolish it to rebuild. Nobody is going to do that in a city alreadt overbuilt for it's population. So should my place be worth $0, or less, based on this analysis. Or can we all just agree this is a stupid exercise to try to value your primary residence on a DCF basis? DCF is for valuing distributable profits from a corporate entity. Not commodities. Not homes. Not even all real estate as demonstrated by plenty of people doing well enough with negative cash flow properties in places like NYC.

What cash flow does aluminum produce? Or is aluminum an input into things manufactured and later sold by corporate entities to produce said cash flows. Is aluminum valued on a DCF basis? Or just the corporations that produce it and the things that it goes into? If the latter, does that mean aluminum shouldn't have a price? Or does it have a price because its value to someone for something that isn't strictly tangible in a DCF model unto the commodity itself? And if the latter, why aren't the savings for payments considered in the value proposition of BTC. Surely paying a few pennies instead of 2% of every electronic transaction over a lifetime has value. Surely saving 10-15% on international remittances and currency conversions has value? Surely the ability to self-custody and participate in the electronic payments eco system without the need for an established banking intermediary has value? Surely being able to carry your wealth with you across borders and in a secure manner has value? Surely it's scarcity alone provides some value like any collectible? But few of these things can be valued by a DCF model because that's an incredibly limited model by which view of the world. The value is the network - not unlike Facebook's value being its network. It just converts that value to USD via advertising. The BTC network has value too - and it that value is "converted" to $ via the secularly rising price of a BTC. As far as comparing BTC to a commodity - it's not a new idea. As a matter of the fact, the existing regulatory bodies all believe it is one. Go figure!

Took them decades to jump on that train and hardware manufacturing is more akin to traditional industry than most things in "tech".

Yield farming is absolutely ponzi-esque

+1 All the respect in the world for Charlie and Warren. But they've entirely missed the boat on basically all things tech related historically. I don't know why I'd expect this to be anything different for them.

Said differently - Every commodity is worthless since it doesn't produce cash flows AND the only thing of value in this world is the legal corporate structures. Ex. My personal residence produces no cash flows and thus anyone willing to pay more than 0 for it is insane. Got it.

The same technology that powers NFTs of monkey pics has the ability to be what displaces title insurance. It just hasn't yet. Just like in 2017 the primary use-case for Ethereum was collectible cats and online games, but 5 years later you have decentralized exchanges, peer-to-peer lending, insurance products, etc all operating on that network (many doing admirably well compared to centralized peers). 10-years ago it was a pipedream to consider BTC a widely accepted currency or payments network and was primarily traded by hobbyists. Today? Two countries have adopted it with others considering doing so. The lightning network facilitates faster/cheaper transactions still secured by the underlying BTC protocol. Payment processors like Square now allow BTC to be paid and/or received in any transaction they process. Billionaires like Jack Dorsey have devoted their entire attention to BTC and decentralized networks. Banks/wealth management/insurance companies now consider it a separate asset class and devote a percentage of portfolios to it. You have countries like Russia investigating BTCs use in international trade settlements to circumvent USD sanctions. The US has clarified tax policy on it legitimizing it for institutional investment. The list goes on and on. Snowballs get bigger as they roll down hill. BTC is getting bigger and the network/adoption/use cases are still generally in a secular uptrend. That's why it's still the best performing asset class of the last decade even after an 80% decline.

Would just add that despite the ~80% collapse in BTC this year, it's still the best performing asset class over a 10-year period (and probably the last 5 years too). Everyone taking celebratory circles on it's decline are still missing the bigger picture and only looking at the last 18 months (a period characterized by increasing adoption and acceptance btw) Most crypto is a Ponzi. I'm happy to see most of it go. But there is definite promise underlying things like DeFi and BTC. For an example? Aave hasn't halted deposits, stopped paying interest, been hacked , etc. despite collapses of Voyager, Celsius, and now BlockFi all who are in the same business. It's been the centralized entities that have proven problematic. If anything, I think this demonstrates the robust nature of a lot of these protocols and the benefits of the DeFi complex when it's done right.

For sure. But the overall change in sentiment = multiple contraction. Just as a rising tide lifts all boats, the receding tide will lower them. There will be outperformers and underperformers, but it might just be easier to pick a different asset class entirely. I imagine from here, gold and bonds will do better than equities. Particularly if inflation proves even stickier than it already has been.

I can never say for certain, but earnings have been "beating expectations" only after those expectations were lowered. Earnings at the index level have started to roll over after Q1 which is especially telling for 2 reasons 1) the Fed hadn't really started hiking in earnest yet 2) inflation was still accelerating suggesting corporations as a whole failed to pass through the rising costs (also confirmed by CPIs vs PMIs) Item 2 might be less of an impact going forward pending what wages do, but 1) still has yet to hit. A global recession caused by the steepest coordinated tightening of global central banks ever hasn't been baked into earnings/revenues IMO. Would also add, one person's cost cutting doesn't happen in a vacuum. All the "savings" of tech companies comes out expense of someone else's earnings/revenues/spending.

I think you misinterpreted it. The "significant" quote was in reference to the cross holdings of FTX tokens capitalizing Alameda and FTX. Not anything to do with GBTC holding their BTC on FTX. The discount is entire based on sentiment which is why ita been widening all year as sentiment has been getting worse each because risk-off is in vogue. I don't expect it to trade quite at NAV again seeing as there are lower-fee ETF alternatives, but could see it narrowing to ~10% once sentiment improves.

Seems to me every nearly every fiat currency this year has failed this exact same test. Is +/- 20-30% really considered "stable"? Can you point one out that has maintained purchasing power over even the last 10-years? Because 10-years ago BTC was a fraction of where it's at today no matter which currency or asset you measure it in. Which one "maintained" purchasing power?

That was true post-2020 when trillions in resulted in ALL risk assets going up and being correlated. But pre-2020 the correlation was basically zero. And at this point, I believe the correlation to equities is the lowest it's been since 2020 (though still positive). At some point, I'd expect it could decouple from equities given the difference in audience buying it, the different reasons for doing so, and the secular growth trend it's experiencing.

The liquidity is key. Anyone who bought TIPS over the last 12-18 months has lost money on a mark to market basis. Anyone buying iBonds has made ~8% over the last 12 months. Which one had the better "real" return? If rates keep rising, which one will have the better return over the next 6-12 months? If equities drop 20% over that time, which one would you want to own to sell to roll into stocks? "Real" yields only matter if you hold to maturity. If you're not holding to maturity, you're better of just ignoring it.

I believe you're right. He'd announced in September that they would start selling. I had thought that was more immediate, but on a double check I don't believe they've started just yet. He just said they probably would at some point. Still went from a buyer who absorbed ~$1.5 trillion worth during pandemic to run-off with sales upcoming. It was a lot of demand removed at the exact same time rising rates made fixed income unattractive. The decades-wide spreads make sense and is an opportunity since these are still essentially federally backed bonds.

Also there's a liquidity premium to be had as the mortgage market has seized up. Mortgage bonds are way more illiquid than treasuries ANd banks that used to offload these in MBS to sell to investors are now having to warehouse more of them on balance sheet since nobody wants to own bonds...and the Fed is selling a ton of MBS too. Now would be the time to buy MBS, as opposed to treasuries, IMO. I don't think it'll be treasuries rising to meet MBS, but MBS falling to meet treasuries.

We will see. It's an estimate informed by a single month so far and the Atlanta Fed has a history of estimates that vary wildly over the course of the quarter. For a long time they were forecasting pretty close to 0% for Q3 and only changed in the weeks leading up to the report IIRC

I tend to agree. Im probably wrong regarding how long short-end yields would sustain above ~3-3.5% rate as I didn't expect multiple 0.75% hikes and hawkish commentary, but that doesn't mean the long end has to move. A positively sloped yield curve is expected in a healthy economy at neutral. We had two quarters of negative GDP growth BEFORE the hiking started and Q3 reading was only good if you're an energy exporter. And the Fed is still hiking. This is not a healthy economy at neutral. It is a quickly decelerating economy with the Fed continuing to tighten. The long-end is going to continue to price in a recession and remain flat to inverted until the Fed uninverts it by cutting IMO. But you'll want to own those intermediate-to-long bonds when they do.

Might be from the slight boost to duration. Finally locking in some of these yields so that interest income is stable and can be modeled. Was hoping for more than a 0.5 year in maturity and duration, but it they keep pushing it out 0.5-0.75 years each quarter then I'll be happy. And it does seem the 2-3 day lag on earnings announcements trend might be over. Was good for while it lasted!

-25% this year so far. My stocks have actually done reasonably well relative to S&P. Largest positions are in Altius, Fairfax, and Exor and all are dramatically outperforming S&P. Trading around my commodity names has also been fairly successful YTD. Collectively these have been ~5% of the portfolio (excluding Altius) so hasn't been hugely impactful. I have a large allocation to short term and intermediate bond funds which are negative YTD, but significantly less so than equities. Still feel pretty good about owning those. Biggest underperformers are my massive allocations to crypto (~20% of my portfolio) and emerging markets (~20% of my portfolio) which does make me feel pretty rough when I look at those individually.

It won't get to $1,000 w/o locking in the duration IMO. Fairfax has had one time windfalls and one time pitfalls. The market doesn't know what to expect year-to-year and recent history has been disappointing so that is what is extrapolated forward. If Fairfax was able to lock in $1+ billion in fixed income coupons for 4-6 years while still maintaining the flexibility to grow that bit by bit each quarter that rates remain elevated...well, that would be showing the market consistency to the earnings power. As long as they keep rolling 1-2 year treasuries, there's the risk that this is another one-time windfall with no sustainability to the earnings power.