Can you guess where the following excerpt originates?
Following the aftermath of a rare and transformative event causing societal upheaval and mass unemployment in certain professions, policymakers stepped in with government issued payments to help citizens cope with their liabilities while unemployed. Quickly, however, this “free money” and more idle time produced speculation in bizarre ‘assets’ like collectibles. Soon a mania unfolded in collectibles where particularly rare items fetched increasingly higher and higher prices to the point of madness.
It sounds like a description of helicopter money in the form of stimulus checks, COVID-related lockdowns, spiking unemployment, and collectible NFTs (non-fungible tokens) in today’s COVID-stricken planet. Yet it was taken directly from the Japanese Meiji Revolution of which my distant relative Ryoma Sakamoto played a key role as he faught for both personal and economic rights for all.
Perhaps not so surprisingly in these trying times, people decided to collect rabbits which resulted in a bunny-based speculative mania. As with any speculative bubble involving collectibles, rabbits with rarer features fetched higher prices. It was the nineteenth century version of cryptokitties. 🙂
But just as with tulip mania and the forgeries of van Gogh paintings, much sense was cast to the wind. Many ‘rare’ rabbits turned out to be fakes:
“Rabbit selling, popular for the first time since the Bakufu days, has recently reached a level beyond all reason, and industry is being lost. Dishonest merchants ask outrageous prices and ensnare the ignorant in their schemes. The common technique is to use Western paints to disguise the colour of a rabbit’s fur, pass it off as a unique species, and sell it to someone from a remote area.”
As such mania tends to swing to extremes, a Japanese newspaper even reported that some wanted to sell their daughters in order to purchase rabbits. Some rabbits were so prized they sold for more than a thousand times the average monthly rent. The bubble blew apart when the government levied a ‘rabbit’ tax. Rabbit prices plummeted.
People through the centuries have always enjoyed showing off their mansions, their art, their jewels, their watches, their collectibles. It is a sign of status in the eye of many. So the Rolex on one’s wrist or the tailored suit from London’s Saville Rowe may grant one a certain level of status in the eyes of others.
The recent Beeple auction of one of his pieces of digital art sold for $69 million. So one might ask why should a digital image command such a high price? While one could simply right click and save the image, it is the equivalent of taking a picture of the Mona Lisa. Is such a duplicate image of the Mona Lisa worth anything? Of course not.
The same goes for NFTs which grant the owner a limited edition of one as verified by the immutable blockchain. No van Gogh forgeries here. And the ease with which NFTs are created then attached to most anything including physical items is transformational in the world of not just collectibles, but intellectual property among other areas.
Digital gaming items have been around since the personal computer revolution in the 1980s. But such items could be hacked and duplicated. With blockchain technology, such is no longer possible, and has spawned a video gaming industry with revenues expected to surpass $150 billion this year along with the value of digital gaming items alone exceeding $50 billion and growing.
NFTs on the blockchain provide a convenient way to identify an item, making it unique. They are digital certificates that authenticate a claim of ownership to an asset. It can then be easily transferred or sold. Jack Dorsey’s original Twitter post is looking to fetch at least a few million dollars.
QE-induced negative yields drive cryptos higher
Part of the mania in NFTs is connected to the big rally in cryptocurrencies. Quite often in the following order, Bitcoin first rallies, then Ethereum, then the alt coins which include companies focused on NFTs. And where goes Bitcoin, goes the cryptocurrency market.
The big rally in Bitcoin and thus cryptocurrencies is largely due to record levels of debt with yields having gone negative or about to go negative. The yield on the German 10yr Bund plunged on March 11 after the European Central Bank unleashed a flurry of buying.
So while yields on the long end of the US Treasury curve continue to trend higher, this will likely come to an end post haste despite the new stimulus package which is inflationary. Such a package can temporarily boost bond yields further.
The NASDAQ Composite should thus find a floor sooner than later, though in the meantime, stuff stocks continue to rise as the price of hard assets move higher in rough proportion to the speed at which the QE-money train is running.
This explains the S&P 500 and Dow Jones Industrials hitting new highs while tech stocks stumble. The pronounced performance difference between the major averages in the US stock market as of late is a rare event. But these are not normal times.
Hyperinflation on the way?
President Biden has said every US adult would be eligible for a COVID-19 vaccination by May 1. Together with warmer weather, this should diminish the effects of COVID thus lockdowns should start to lessen.
When you combine that with the staggering amount of cash from helicopter airdrops and other programs, consumer confidence should bounce. This will trigger inflation. The question will be, “How much?”
If history is any guide, in the 1920s, Germans held tightly onto their cash, so the result was a short-lived depression. It was only a year or so later when hope was restored that Germans started spending again.
With the massive sum of German marks having been printed, this triggered runaway inflation which ended in the historical hyperinflation well chronicled in history books.
Keep in mind that Germany back in the 1920s had lost World War I so they were economically devastated, thus the “mad” money printing.
Today, governments are broke and printing like there’s no tomorrow. If and when the inflation curve got ahead of central banks, they would be unable to reduce quantitative easing as such would likely induce a major market crash.
Such reductions in the punch bowl have been tried over the last decade. Each time, we saw the major market averages quickly correct around -20%. Some may remember the Christmas crash of Dec 24, 2018, the first on record, when the Fed then had to fully reverse their position of tightening their balance sheet and increase QE once again.
Bitcoin was created for such eventualities. Its whitepaper details this brilliantly. With increasing levels of debt, the odds of Bitcoin becoming the world’s major reserve currency increases. The dollar, the euro, the pound, the yuan, and other major forms of fiat would co-exist but take a substantial step backwards in their influence over the world.
Petrodollars, which have been the bane of trade giving the US an unfair advantage for decades, would be threatened.
Next week, I will discuss the implications of a world with Bitcoin as the sovereign currency. Stay tuned.
Dr Chris Kacher, nuclear physicist PhD turned stock+crypto trading wizard / bestselling author / blockchain fintech specialist / top 40 charted musician. Co-founder of Virtue of Selfish Investing and Hanse Digital Access.
Dr Kacher bought his first Bitcoin just over $10 in January-2013. His metrics have called every major top & bottom in bitcoin since 2011. He was up in 2018 vs the median performing crypto hedge fund at -46% (PwC) and is up quadruple digit percentages since 2019 as capital is force fed into the top performing alt coins while weaker ones are sold.