The PolyCapitalist's New Bitcoin Price Target Is...

As regular TPC readers will know I'm rather fond of alternative currencies like Bitcoin, the Little Virtual Currency that Could.

And so too now is the U.S. Treasury Department's Financial Crimes Enforcement Network, or FinCen.

As the above linked-to WSJ article notes the exchange rate for Bitcoin has been on a tear of late, with the currency trading up 57% during this week alone.

The recent runup in Bitcoin's price has apparently been driven by events in the Eurozone, as well as the additional credibility conferred on the currency now that FinCin has officially acknowledged its interest in virtual currencies like Bitcoin and outlined its criminal enforcement plans. If you're long Bitcoin getting the Fed's attention is apparently a good thing (at least in the short-term).

Now, naturally, readers of blogs like this one have one big question on their minds: where is the price of Bitcoin heading next? 

For the answer to that question I'll turn this post over to the brand new PolyCapitalist Research Department (PCRD), which is my crack team of ambitious research quants. All male 20-somethings straight out of the best schools. Take it away, PCRD!

PCRD: Thank you, TPC. We are very pleased to announce that we are initiating research coverage of Bitcoin with an opening price target of....

TPC: Now, now wait just a minute, hold on there PCRD. As the head of this blog I feel we have a responsibility to our readers. So before you guys go out and announce a price target maybe we should first discuss how you went about valuing Bitcoin?

PCRD: We're so glad you asked us that, TPC, as we put a lot of work into this. First, we developed a rich quantitative data set. For example, we researched what a Bitcoin can buy in the real world and what those items cost in traditional currencies such as U.S. dollars. We also looked at what if any exchange rate conversion expenses exist. And so on.

TPC: That sounds like an excellent start. What else did you do to determine the proper price of a Bitcoin?

PCRD: We next built a rather detailed MS Excel model which factored in other data, such as price trends, liquidity analysis, and other temporal factors.

TPC: Excellent. Did you perform any further analysis?

PCRD: Yes we did. We also stress tested our model by running several different scenarios based around Black Swan type events. For example, we ran a Monte Carlo simulation on the impact to Bitcoin's exchange rate with the euro if Cyprus left the Eurozone.

TPC: Or a Black Swan 'outlier' like another Bitcoin market crash?

Pin-up found in the PCRD cubicles

PCRD: Uh, right!

TPC: Ok, great. So I'm dying to know what price target you guys came up with for Bitcoin?

PCRD: Well, as robust as our modeling was we decided to scrap what the spreadsheet told us and just use the price target set by the guys over at bitcointalk.org. They seem have a better feel for Bitcoin's momentum and how this market is going to play out. They also seem like real stand-up fellas, and they even refer to their "Bitcoin exit strategies".

TPC: Got it. Yeah. Um. Guys, I really appreciate all the work you have been doing but I think we're going hold off on setting a Bitcoin price target for now. Better yet, I think we're just going to close down the entire PCRD.

Sandy's Key Lesson Applies to More Than Bad Weather

The NY Times is out with a story today chronicling all the warnings about Gotham's vulnerability to storms and flooding.

Loss of life and economic devastation are made all the more tragic when we realize that these losses were at least in part preventable.

But as an anonymous source close the New York government officials put it:

"until things happen, people aren’t willing to pay for it".

Indeed.

As Nassim Taleb, et al have written about, there are deep psychological and evolutionary roots to our species' tendency to ignore seemingly low probability, catastrophic events until it is too late.

Explain this 'insurance' thing to me one more time?

Perhaps as the human species was evolving and facing a daily battle for survival there was a prohibitive cost to planning too far into the future. Now, however, with the hunting/foraging days long gone for most of us, we're still stuck traveling through life with the same 'Cave Man software' of our forefathers.

With Mother Nature having reminded us what she's capable of there will likely be some changes to storm protection systems along the East Coast. But unfortunately I'm not terribly optimistic that we can extrapolate the lessons of Sandy to other systemic risks, such as asteroid collision, climate change, and number one focus of this blog, financial crises.

Sadly, the Cave Man is still in charge of this joint.

A Good Evening to Stay Indoors and Watch a Movie

Dear East Coast, hang in there and hold on tonight! -TPC

Bob Balaban eyes the shifting weather in Moonrise Kingdom

Video: Nassim Taleb On Occupy Wall Street

Video after the jump:

Video: Profile of Michael Burry of 'The Big Short'

Michael Lewis on How a Japanese Earthquake Could Devastate Wall St.

ML_Tokyo

Video: Animated Visualization of Japan's Nuclear Meltdown

Video: Nassim Taleb Interviewed on Charlie Rose

The author and professor was on Charlie Rose this week talking about debt, financial fragility, the Fed and Bernanke, why Europe is more robust than the U.S., and other topics.

Link to interview here.

Video: Revolution in Cairo (Frontline PBS)

Superb footage of the revolution in Cairo. If you live outside the U.S. and are unable to view this video check out this link for quick and easy way to watch it.



The Frontline website contains some additional videos, articles and links on this topic that are worth your time.

Guest Post: Taking Stock of WikiLeaks

By George Friedman, STRATFOR

Julian Assange has declared that geopolitics will be separated into pre-“Cablegate” and post-“Cablegate” eras. That was a bold claim. However, given the intense interest that the leaks produced, it is a claim that ought to be carefully considered. Several weeks have passed since the first of the diplomatic cables were released, and it is time now to address the following questions: First, how significant were the leaks? Second, how could they have happened? Third, was their release a crime? Fourth, what were their consequences? Finally, and most important, is the WikiLeaks premise that releasing government secrets is a healthy and appropriate act a tenable position?

Let’s begin by recalling that the U.S. State Department documents constituted the third wave of leaks. The first two consisted of battlefield reports from Iraq and Afghanistan. Looking back on those as a benchmark, it is difficult to argue that they revealed information that ran counter to informed opinion. I use the term “informed opinion” deliberately. For someone who was watching Iraq and Afghanistan with some care over the previous years, the leaks might have provided interesting details but they would not have provided any startling distinction between the reality that was known and what was revealed. If, on the other hand, you weren’t paying close attention, and WikiLeaks provided your first and only view of the battlefields in any detail, you might have been surprised.

Morbidly Cool Website: The 'Impact Catastrophe Calculator'

Following up my recent post on the Ultimate Black Swan, if you're curious about how much damage different types of asteroids would do if they struck earth check out the 'impact catastrophe calculator'.

You can customize your asteroid along the following parameters:

• Diameter - a prepopulated list gives asteroid sized options such as a school bus, the Empire State Building, or the London
• Density - i.e., ice, porous rock, iron, etc.
• Impact Angle
• Velocity
• Surface type struck (i.e, sedimentary rock, water, etc.)

A brief video showing your asteroid careening for earth plays, which is then followed up with a damage report detailing the crater size, etc.

Cheap Insurance Against the Ultimate Black Swan

With minds fixated on next week's U.S. midterm elections and Fed QE2, I thought it could be a nice, light distraction to write about the greatest known threat to life on earth.

What is it?

Global warming, infectious disease, and thermonuclear war are some of the more common answers to this question.

However, there is another threat of perhaps even greater danger which doesn't receive nearly as much airtime, or resources devoted to its prevention.

Illustration of an asteroid impact

Former astronaut Russell Schweickart recently penned a NY Times piece on the very real risks posed by asteroids to life on earth. I had the pleasure of meeting Mr. Schweickart several years ago, and he is generally considered the leading advocate for increasing awareness and addressing this threat.

Asteroids -- as any T-Rex fan will attest -- can be absolutely devastating. Strong scientific evidence suggests that 65 million years ago an asteroid of approximately seven to eight miles in diameter struck near Mexico and wiped out the dinosaurs and over half of all species.

It doesn't take an eight mile asteroid to cause significant damage. The 'Tunguska event', which featured an asteroid with a diamater of only 120 feet, leveled approximately 800 square miles of (thankfully) relatively empty Siberian forest. An asteroid much smaller than Tunguska could hit a heavily populated area and cause a loss of life in the millions.

Can Anything Be Done?

There is some good news. We already possess the technical knowledge to prevent asteroid impact. We can detect asteroids that may collide with earth, sometimes up to a decade in advance of potential impact. We also know what to do once we've spotted one that's on a collision course with our planet. One option can be described simply as using a spacecraft to "rear-end" the asteroid. This alters the asteroid's trajectory away from earth.

The bad news is that we are not investing the relative pittance it would take to mitigate asteroid impact risk. Schweickart estimates that it would cost roughly $250-$300 million over the next 10 years to track all asteroids and fully develop the deflection capability. Annual maintenance expense for the program would be $50-$75 million. These figures represent a small fraction of the U.S. federal budget.

Further, international discussions are underway so that the U.S. may not have to foot the entire bill. The below video features Russell Schweickart speaking about asteroid risk and international coordination at a recent European Space Agency meeting in Germany.



So, the choice is pretty clear. We can either spend a few hundred millions dollars and mitigate asteroid risk. Or we can continue to roll the dice risking perhaps all life on earth.

Do we really need to think hard about this one?

Federal Reserve Continues March Down the Primrose Path

Federal Reserve Chairman Ben Bernanke and his army of monetary economists have now had four months to observe the lay-of-the-economic land since winding down their massive $1.2 trillion in mortgage bond purchases.

How do things look? Based on the Chairman's recent comments, not good.

Peer Pressure, Washington Style

When the economic going gets tough and then stays tough for a protracted period there is one institution politicians can be counted on to turn towards for help, and that institution is the nation's central bank.

In the U.S. this political pressure typically involves congressman, and presidents, banging on about how the Fed needs to 'do something'. These politicians, often facing an upcoming election, are making noise so that if monetary surgery fails to deliver a cure (economic growth) it will at lease provide the scapegoat (the central bank).

With the U.S. Congress currently facing historic low popularity and re-election right around the corner, mild-mannered Ben Bernanke is feeling the heat of D.C.'s boiler room. Case in point, Senator Jim Bunning pressed the Chairman during recent testimony on whether he was "out of bullets?", to which Bernanke replied "well, I don't think so." 

What 'bullets' are Jim and Ben referring to?

The Mother of All Bullets

To answer the above question we have the luxury of being able to refer back to the verbatim text of a speech Ben Bernanke delivered in 2002 titled Deflation: Making Sure "It" Doesn't Happen Here (which I've written about previously). 

The economic problem du jour just so happens to be deflation. In the speech, Bernanke outlines detailed steps the Fed could take to combat deflation, which is basically a widespread decline in prices. The last time the U.S. experienced this was during the Great Depression, an area of economic history which Dr. Bernanke is considered to be one of the pre-eminent experts. 

Bernanke's most oft-quoted line from his 2002 speech: "the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost."

Put simply, Dr. Bernanke's deflation prescription is to print a 'ton-o-money'. 

How much money? Given that the nearly $2 trillion printed since the inception of the 2008 financial crisis hasn't created significant inflation concerns, estimates as high as an additional $5 trillion may not be beyond consideration.

QE2: No Longer a Question of If, But When

On Thursday St. Louis Fed President and FOMC voting member Jim Bullard wrote that the U.S. is at risk of Japanese-style deflation and that it should be actively combated by engaging in "quantitative easing" (aka printing money) through Fed purchases of U.S. Treasuries. Bullard had beenconsidered until now one of the Fed's principal 'inflation hawks'.

One interpretation of Bullard's comments is that the Fed is laying the groundwork for 'QE2', the shorthand label which has attached itself to the Fed's latest scheme.

Market Timing QE2

With QE2 fully baked when precisely will it begin?

November congressional midterm elections are a bit of an x-factor for the Fed. Like his predecessor, Bernanke is a Republican. And, again like Greenspan, he was reappointed by a Democratic President. I suspect that, barring another major crisis in the interim, Bernanke & Co. would prefer for QE2 be perceived as apolitical. Consequently, the Fed will likely wait to crank up the printing press until after midterms.

In terms of QE2's implementation, expect an iterative print, evaluate, and then decide to print some more type process. The Fed would probably prefer to trickle QE2 out over an extended period, ala the Bank of England's approach. But, as Bullard suggests, a sudden and rapid deterioration in confidence may force the Fed to go the 'shock and awe' route.

Meanwhile, In Government Debt La-La Land...

In contemplating a new $5 trillion money printing program a reasonable person might be inclined to ask the following question: "if the Fed keeps printing money to buy government bonds, doesn't that potentially create a problem for maintaining the value of the U.S. dollar?"

Uh, yeah.

The prospect of QE2 may be currently driving U.S. Treasuries to rally even further into nose bleed territory as the market contemplates the supply of government debt being squeezed by the Fed even further. And if the Fed doesn't activate QE2 then deflation (or disinflation) could continue to make U.S. Treasuries attractive to investors. So on the surface U.S. Treasuries may at present appear like a win-win trade.

Having said that, printing money at these levels represents a massive and unprecedented financial experiment. Our policy leadership has now guided us into uncharted economic territory and there really is no telling for sure just what will happen.

Nassim Taleb, for one, is calling government debt "the next black swan." In a recent interview he even went so far as to call government debt "a pure Ponzi scheme".

There are several ETF options available for those looking to hedge or play U.S. Treasuries. And if the prospect of massive money printing has you concerned about the future of paper money, then you may want to consider precious metals like gold.