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The Bezzle


hasilp89
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A long thread here, but I hope folks take the time to read and provide any thoughts. 

 

In the last couple of weeks I’ve been thinking about the ridiculous public and private valuations we’ve seen in the last few years and how those are coming home to roost. At the same time I was trying to wrap my head around the idea that  these insane overvaluations must have some unrecorded sort of fake wealth effect.

 

An example - Wework was “valued” at $47b at one time. Even though $47b of cash value was never created/transacted and passed around the economy, investors  marked up the asset side of their balance sheet and in effect $47b was created -was the economy $47b more wealthy though? No but on paper people thought it was and acted like it. Not sure if the right term is the multiplier effect but because of this marked up asset other wealth creating activities took place (borrowing against the asset, options were created for individuals etc.) Eventually that process reversed and everyone was marked down. 

 

In the public markets you could use PTON, was it ever $40b of real value to the economy? (Can go into it with crypto as well). Yet people acted, spent and borrowed like it was.

 

This morning someone posted on twitter how BX’s returns show how hard public investing, where you’re marked to market daily, really is.  My thought was sure, but so is all investing,  the private valuations are just made up. This linked up with my thoughts over the last few weeks and it clicked this must be the bezzle.

 

Many years ago when I first read poor Charlie’s almanac I read about the bezzle, original coined by Gailbraith. At the time and up until recently I never really understood what it meant but it’s become pretty clear now.

 

The article below is a good summary but would be interested to hear peoples experiences with bezzle (maybe folks are calling it ponzi capitalism today). As it is not recorded anywhere it can be hard to spot, record or even describe. However I think I’d be a better investor by trying to do so - goes with out saying but these are the types of investments and situations to avoid. (also if I’m talking out of my a$$ somebody please let me know 😜)

 

 

https://carnegieendowment.org/chinafinancialmarkets/85179

 

  • the bezzle represents recorded or perceived wealth that does not exist as real wealth it gooses gdp growth in 3 ways
    1. temporary wealth effect that boosts consumption and investment spending to a level higher than where either normally would have been.
    2. when part of this false wealth shows up either as higher income or higher profits for the entity that benefits from the boost in recorded wealth
    3. when rising market values collateralize increases in borrowing that are then used either to raise prices further or to increase spending. It is not a coincidence that GDP growth rates are always higher than expected in periods during which a great deal of bezzle is being created
  • The reverse is true when bezzle needs to be recognized. One or more sectors of the economy must absorb the loss. the wealth effect reverses, their lower earnings or profits are reflected in lower-than-expected GDP figures, and they are forced to pay down the debt
  • It follows a cyclical nature, it gets built up and then destroyed. It  is self reinforcing in either direction - the wealth effect is magnified on the way up, but it’s punishing on the way day

 

 

 

 

 

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16 hours ago, hasilp89 said:

A long thread here...

  • The bezzle represents recorded or perceived wealth that does not exist as real wealth it gooses gdp growth in 3 ways
    1. temporary wealth effect that boosts consumption and investment spending to a level higher than where either normally would have been.
    2. when part of this false wealth shows up either as higher income or higher profits for the entity that benefits from the boost in recorded wealth
    3. when rising market values collateralize increases in borrowing that are then used either to raise prices further or to increase spending. It is not a coincidence that GDP growth rates are always higher than expected in periods during which a great deal of bezzle is being created
  • The reverse is true when bezzle needs to be recognized. One or more sectors of the economy must absorb the loss. the wealth effect reverses, their lower earnings or profits are reflected in lower-than-expected GDP figures, and they are forced to pay down the debt
  • It follows a cyclical nature, it gets built up and then destroyed. It  is self reinforcing in either direction - the wealth effect is magnified on the way up, but it’s punishing on the way day

FWIW, i think this is interesting.

Going from bottom-to-top, the wealth effect (at least the marked-to-market usual meaning, on consumption) is for real and happens at the margin although the effect appears to be quite limited overall.

For example, this has been looked at in Japan (late 80s) and most evidence since then points to the same story. The Japan example below has a section on the effect of 'wealth' on consumer expenditures (and fixed investment for the Japan example). The Japan example is unfair because it's an ex post example of reversion to the mean (and more) and maybe this time is different..

VI Movements in Asset Prices Since the Mid-1980s in: Saving Behavior and the Asset Price "Bubble" in Japan (imf.org)

Below is a personalized (and simplified + adjusted for an intersection point in Q1 2000) Fred graph showing the relative trends of income, household net worth and expenditures:

1808452953_wealtheffect3.thumb.png.77f82824348422e18375c225ea7ff9a0.png

The income is the main driver. Adding the personal consumption expenditures on durable goods (not shown here) results in a noisy graph but shows some wealth effect, especially recently and this may explain some of the momentum behind the likes of Peloton, Restoration Hardware and even Tesla? or even iPhone sales??

-----

Chart 6-7 in the late 80s article has a graph showing the relation between household net worth and income and it's sobering (who can say what really lies ahead?) to read that the authors (article published in the early 90s) 'felt' that stocks and the economy in Japan were back to their long term trend line..

Here's the recent US picture:

20629427_wealtheffect.thumb.jpg.7168649e45239a00449f081d18ec5f0f.jpg

The first added circle was when i started investing and the second circle was when i decided to plan for retirement. What's coming next?

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A personal anecdote: A few years ago, I started working in a small company together with former colleagues (who started it). We all bought shares, and after a while the company went public and the share-price increased. At one point our shares was up 4x, and since this was my biggest single "investment" (not much value investing thinking there) ever, the amount felt quite substantial. "I can almost cash out my mortgage"-big, not "I can retire"-big. 

 

Around this time, both me and two colleagues bought a cabin/vacation-house. It is not unusual for people in Norway to do this, and the purchases were not directly "funded" by the price of the shares. I could have bought the cabin without having the shares, and I did not sell any shares to finance the purchase. Nor did the bank we loaned part of the purchase-sum from take the shares into consideration. But, and to the point of this thread, I felt "richer", and this probably influenced the decision. 

 

(Fast forward to today, the share-price fell well bellow the initial price we bought them for. We enjoy the cabin, which ironically has increased its valuation. I retrospect it looks quite silly that I call myself a value investor, and did not sell any shares at that high valuation. For all practical purposes I was an insider, and if anything this has made me more sceptical to insider buying as a strong positive signal. People close to the company might know more than outsiders, but drinking all that kool-aid does something to judgement)

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Excuse the complete ignorance here, but "#9922 market rank"....

Are there almost 10k crypto currencies in current circulation i.e. one potential entire crypto currency per 2100 bitcoin? That's nuts. 

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27 minutes ago, JAK said:

Excuse the complete ignorance here, but "#9922 market rank"....

Are there almost 10k crypto currencies in current circulation i.e. one potential entire crypto currency per 2100 bitcoin? That's nuts. 

Why is that nuts?  You can create 10K more cryptocurrencies if you'd like.  I'm sure there are millions of them in existence on someones' computers somewhere in the world, but only 10K of them are generally exchangeable.   It is early in this technology an ecosystem is emerging and new ideas are being tried.   Cryptocurrencies are going to come and go by the 100s of thousands in the next decade or two.

 

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47 minutes ago, JAK said:

Excuse the complete ignorance here, but "#9922 market rank"....

Are there almost 10k crypto currencies in current circulation i.e. one potential entire crypto currency per 2100 bitcoin? That's nuts. 

 

"Cryptocurrencies" is used as a catch-all now even though most of these don't purport to be currencies nor do they have the properties to be so. That is reserved for BTC and a handful of others. 

 

The remainder? Largely what would be considered utility tokens. Nearly every dAPP that is made comes with its own token. That token could be used for any sort of function. It could be required for governance votes (i.e. tokenholders vote on future direction like a stockholder might) OR tokenholders could be the ones capitalizing the project and reaping its rewards, or there could be differences in the issuer/trust levels like the variety of stablecoins currently in circulation that all have the intended purpose of tracking the USD in some different way or by a different issuer. 

 

So think of most of these crypto currencies as "tokens" or similar to stocks. How many stocks/companies do you envision to be in existence? There is the possibility for each one to be replaced by a token. 

Edited by TwoCitiesCapital
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9 minutes ago, TwoCitiesCapital said:

 

"Cryptocurrencies" is used as a catch-all now even though most of these don't purport to be currencies nor do they have the properties to be so. That is reserved for BTC and a handful of others. 

 

The remainder? Largely what would be considered utility tokens. Nearly every dAPP that is made comes with its own token. That token could be used for any sort of function. It could be required for governance votes (i.e. tokenholders vote on future direction like a stockholder might) OR tokenholders could be the ones capitalizing the project and reaping its rewards, or there could be differences in the issuer/trust levels like the variety of stablecoins currently in circulation that all have the intended purpose of tracking the USD in some different way or by a different issuer. 

 

So think of most of these crypto currencies as "tokens" or similar to stocks. How many stocks/companies do you envision to be in existence? There is the possibility for each one to be replaced by a token. 

 

 

It's even more than that though.  Don't think of them as "companies" think of them as products or applications.  How many products are there in the world?  What is the potential number of software applications humanity could create?  10K is a very small number.

 

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Thanks for the clarification. 

The 10k figure just stuck me as a large amount, if those were individual currencies, given a lot of the noise about crypto (at least to this uninformed observer whose only information to date has been reading Twitter fights between opponents / proponents for pure entertainment) is that unlike Fiat, the supply of BTC is capped... of course, as you say, just because there are 10k coins, doesn't mean all 10k would be accepted. 

 

Also, I had thought about YOLO'ing some lottery type money into some random coins. I think my Revolut account has maybe 20, as an asymmetric bet on the odds of one of them going 1000X. But if €5 on each would mean €50k rather than €100, then I might have to reconsider that idea.  

Again, no idea about crypto, and don't want to divert the thread into a discussion about it! Was just curious if there are 10k individual currencies in existence !

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11 hours ago, TwoCitiesCapital said:

 

"Cryptocurrencies" is used as a catch-all now even though most of these don't purport to be currencies nor do they have the properties to be so. That is reserved for BTC and a handful of others. 

 

The remainder? Largely what would be considered utility tokens. Nearly every dAPP that is made comes with its own token. That token could be used for any sort of function. It could be required for governance votes (i.e. tokenholders vote on future direction like a stockholder might) OR tokenholders could be the ones capitalizing the project and reaping its rewards, or there could be differences in the issuer/trust levels like the variety of stablecoins currently in circulation that all have the intended purpose of tracking the USD in some different way or by a different issuer. 

 

So think of most of these crypto currencies as "tokens" or similar to stocks. How many stocks/companies do you envision to be in existence? There is the possibility for each one to be replaced by a token. 

 

Is anyone else surprised that the SEC hasn't enforced the Securities Act?

 

(You had ONE job...)

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1 minute ago, IceCreamMan said:

 

Is anyone else surprised that the SEC hasn't enforced the Securities Act?

 

(You had ONE job...)

 

Maybe the Securities Act only applies to businesses, not Ponzi schemes. One possible explanation.

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14 hours ago, IceCreamMan said:

 

Is anyone else surprised that the SEC hasn't enforced the Securities Act?

 

(You had ONE job...)

 

It's a brand new industry an unclear if these "tokens" fit the current definition of a security. 

 

The way SEC defines security today basically suggests you have some ownership in, or interest bearing security of, an enterprise. 

 

But the way most of these tokens work is that owning the token doesn't really give you much of anything. It's what you do with it.

 

For example, there is a decentralized crypto derivative exchange called Kwenta. The exchange backs each trade (as opposed to finding an offsetting counterparty). 

 

Who capitalizes this exchange and ensures that the derivative profits are paid to traders? That's where SNX token holders come in. In exchange for trading fees and new SNX issuance, SNX token holders post their SNX as collateral for the exchange to back/settle all trades. 

 

But buying the SNX and holding it doesn't entitle you to anything. It's only the act of posting the SN as collateral, and risking it's loss, that you achieve any return. 

 

So is the SNX token a security? By buying it and holding it you've accomplished nothing and have no economic interest in any Enterprise or activity other than solely being exposed to price fluctuations. 

 

Owning SNx doesn't pay you interest. It doesn't entitle you to vote. It doesn't entitle you to a proportion of economic gains/losses. It literally does nothing....unless if you stake it as collateral.  Is that a security? It might be...but it doesn't fit the current definition or look like anything else that we call a security. 

 

But any further convo on this should probably be taken to the crypto thread so we don't derail this one. 

Edited by TwoCitiesCapital
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9 hours ago, TwoCitiesCapital said:

 

It's a brand new industry an unclear if these "tokens" fit the current definition of a security. 

 

The way SEC defines security today basically suggests you have some ownership in, or interest bearing security of, an enterprise. 

 

But the way most of these tokens work is that owning the token doesn't really give you much of anything. It's what you do with it.

 

For example, there is a decentralized crypto derivative exchange called Kwenta. The exchange backs each trade (as opposed to finding an offsetting counterparty). 

 

Who capitalizes this exchange and ensures that the derivative profits are paid to traders? That's where SNX token holders come in. In exchange for trading fees and new SNX issuance, SNX token holders post their SNX as collateral for the exchange to back/settle all trades. 

 

But buying the SNX and holding it doesn't entitle you to anything. It's only the act of posting the SN as collateral, and risking it's loss, that you achieve any return. 

 

So is the SNX token a security? By buying it and holding it you've accomplished nothing and have no economic interest in any Enterprise or activity other than solely being exposed to price fluctuations. 

 

Owning SNx doesn't pay you interest. It doesn't entitle you to vote. It doesn't entitle you to a proportion of economic gains/losses. It literally does nothing....unless if you stake it as collateral.  Is that a security? It might be...but it doesn't fit the current definition or look like anything else that we call a security. 

 

But any further convo on this should probably be taken to the crypto thread so we don't derail this one. 

 

Thanks for the response. I see what you mean, but it still looks to me like finding technical loopholes to evade securities regulation. Agree on continuing in a crypto thread.

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