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.

What Happened to Cyprus's Deposit Insurance Scheme?

So much for all quiet on the Eurozone front, a quiet which barring election rumblings from Italy has largely been enjoyed since Drahgi's LTRO blitz.

While it's unclear whether this weekend's 'bailing in' of Cyrpiot depositors will prove the trigger point for the final Eurozone reckoning, what is clear is that all the 'crazies' who have been stashing their money under their mattresses perhaps weren't so crazy after all.

One thing I'm curious about, which I haven't seen discussed in any detail anywhere else, are the mechanics behind what happened to Cyprus's deposit insurance scheme.

For example, is the insurance scheme, like the entire Cypriot banking system, insolvent? If yes, by how much? Could it be recapitalized through a tax? Etc.

The high level details of Cyprus's deposit insurance program, which goes by the name Deposit Protection Scheme (DPS), are discussed on the Central Bank of Cyprus's webpage here. As has been widely reported, depositors in Cypriot banks are supposed to be fully insured for €100.000 "per depositor, per bank".

Some reports state that if Cyprus's banks were allowed to fail then the small, fully insured depositors would be made whole. So do depositors who have €100.000 or less of insurable deposits have recourse for legal action in Cyprus?

One thing is clear: if I were a Cypriot depositor I would much rather have cash right now than shares in an insolvent bank.

Video: Bill Emmott's 'Good Italy, Bad Italy - Girlfriend in a Coma' (Full Video)

"Those whom the gods would destroy, they first encourage to borrow cheaply"

Today's must read on the next financial panic.

Video: The Great Euro Crisis (BBC)

A good series of interviews for understanding why many Greeks (and Germans) still prefer that Greece keep the euro rather than return to its previous currency, the drachma. 

Self-confessed Eurosceptic Michael Portillo visits debt-stricken Greece. He believes that the euro crisis must have shaken the Greeks' faith in Europe's single currency and wonders if there'll be a desire to revert to the free-floating drachma. In Athens he meets everyone from a destitute young family to the former finance minister and the outgoing Prime Minister, and is surprised by some of their answers. Meanwhile in Germany, Europe's economic powerhouse, Michael encounters the taxpayers who are paying most towards Greece's mammoth financial bailout while having to watch angry Athenians burning the German flag.

Greek ATM Withdrawal Limits Under Discussion

More here.

On The Problem With Postponing the Inevitable

Today's Eurogeddon must read.

Lagarde Sacrifices Herself to Help Greece's Pro-Bailout New Democracy Party?

The Eurogeddon chess game is getting desperate so don't be surprised to see a few political/PR curveballs over the next few weeks in front of the 17 June Greek election runoff.

Case in point is this weekend's snarky comment from the typically ladylike Madame Lagarde. But before we get to that, some background:

The single worst thing than can happen from the perspective of the Troika (the IMF, EU, and ECB) and Greek elites right now is for Syriza and its 37-year old leader, 'Sexy Alexis', as he's now being called, to do well in the 17 June Greek election runoff.

In the most recent May elections Greek voters turned away from the two pro-bailout/austerity parties, PASOK and New Democracy, as they were seen as tools of the Troika. This rejection by voters sent a shiver up the Troika's spine as they know that should Syriza and Alexis Tsipras prevail he will likely walk away from the terms of the bailout and thereby call the Troika's bluff to either a) cut off Greece's banking system from further ECB funding or b) terminate any further bailout money to Greece's government. Either one of these moves will likely trigger a financial panic and spoil everyone's summer vacation plans.

So the Troika are now desperate to see PASOK and or New Democracy do better in the 17 June election. So how can they help them?

Agent Provocateur: Christine Lagarde, IMF Chief

Angry Greek voters are looking for someone to blame, and as long as PASOK and New Democracy are seen as part of the problem it's unlikely that voters will put them back into power. So one strategy is to try and reshift the political blame onto the external Troika, which would have the effect of diverting negative feelings away from PASOK and New Democracy. This would help the two pro-bailout Greek parties reposition themselves as domestic victims rather than as co-conspirators with the hated foreigners.

And now you understand why the typically politie Christine Lagarde, head of the IMF, probably deliberately roiled the Aegean kettle this weekend with a comment about how it's 'payback time', and Greeks need to pay their taxes.

Queue the Greek firestorm.

And lo and behold, New Democracy, who of course along with PASOK quickly denounced Lagarde's rhetoric, is again rising in the polls.

Nice move, Troika.

And, by the way, Lagarde doesn't pay any taxes on her $551,700 in annual compensation.

Greece QOTD: "Papadreou was clueless. Papademos was complicit. Where does blame really lie?"

Atta boy, AEP.

Young People CAN and ARE Making a Difference in Europe

Getting more young people (and women) into positions of political power is a good thing.

Alexis Tsipras, leader of Syriza

Whether you agree or disagree with the politics of 37-year old Alexis Tsipras, the leader of a leftist-Greek coalition which surprised in the weekend election, he has demonstrated that not every member of the next generation is politically impotent.

While this blog probably would not be characterized as far left-wing, we do celebrate seeing someone under-40 years of age achieving political success.

Bravo, Alexis!

Photo of the Week: Athens On Fire

Tonight Athens burns

The German flag is burned in Athens earlier in the week

h/t Zerohedge and Guardian

Photo of the Day

Chancellor Merkel's likeness is used to advertise Portuguese spirit Beirao on a Lisbon billboard reading: 'Dear Angela, Portugal is giving its best. Seasons Greetings.'

h/t AEP

Soros: Euro crisis "more serious and more threatening than the crash of 2008"

Link here.

Greece Just Publicly Threatened Its Trump Card

Greece just decided to start 2012 off by significantly upping the ante:

"The bailout agreement needs to be signed otherwise we will be out of the markets, out of the euro," spokesman Pantelis Kapsis told Skai TV.

 Here's my previous piece explaining why in the European sovereign debt crisis Greece holds all the cards.

Prediction #1: U.S. Dollar Bears Will Remain On the Run in 2012

Since its March 2008 low the U.S. Dollar is up 13% against a basket of the world's most widely held currencies, including the yen, sterling, franc, loonie, krona, and of course the beleaguered euro.

How is this a problem for portfolio manager Axel Merk, the self described "Authority on Currencies"? After all, according to Merk's written after-the-fact letters he claims to have traded out of and back into the euro just in time to surf its wild gyrations.

Merk moved his fund management business to California a number of years ago, where he has been beating a steady 'demise of the U.S. dollar' drumbeat ever since. This past year Merk Funds even took to deploying amusing anti-Dollar cartoon propaganda while routinely touting the superiority of the euro over the U.S. dollar.

Continue reading the full article at Seeking Alpha here.

Eurozone QOTD: "You've got insolvent banks supporting insolvent sovereigns and insolvent sovereigns supporting insolvent banks"

Quote is from Bridgewater, which with an estimated $122 billion in assets under management is the world's largest hedge fund.

Previously Bridgewater founder Ray Dalio said he didn't expect the next major crisis to hit until 2013, but it appears his firm is positioned for a rocky 2012.

Recapping The PolyCapitalist's 2011 Predictions

For those keeping score three topics I made 2011 forecasts on were:

1. Rise of Android
2. China's bubble
3. U.S. Housing

On Android, the verdict is in:

The U.S. housing market officially double dipped in May and then continued to fall, so that call looks correct as well.

The China prediction is a bit murkier, but here are some points worth noting:

• The Hang Seng and Shanghai stock markets are in a bear market and down roughly 20% for the year, or 30% since May. From its peak in 2008 Shanghai is off 60%.
• Housing prices are softening quickly; in Beijing new home prices dropped 35% in November alone.
• Coastal cities such as Wenzhou and Ordos appear to be experiencing a credit crisis with reports of businessmen leaping off rooftops.
• Hot money appears to be flowing out of the country: China's $3.2 trillion in foreign reserves have been falling for three months despite a trade surplus.

Things aren't shaping up too well for China or trade relations with the U.S. in 2012 either. For more on this see here, here, here and here.

Overall, does 2.5 out of 3 predictions sound about right?

Two more quick ones: bullishness on gold has been a steady theme since starting this blog in May 2010. And how did gold do in 2011? Despite the autumn selloff gold priced in U.S. dollars has returned around 10%. Not too shabby given that the S&P500 is flat YTD. I also managed a correct mid-year bearish call on the euro.

Check back later for The PolyCapitalist's 2012 predictions.

Will the Next Decade Be Dominated by America?

'Tis the season for predictions and STRATFOR's George Friedman has come up with a whopper.

The first chapter of his new book has been posted here. The main provocative claims is that the American 'Empire' will continue to be dominant over the next decade.

Will it? Here are a couple comments on Friedman's chapter:

First, I would take some issue with simplifying the Great Depression down to having originated in Germany. The role of Germany in the Great Depression does actually deserve more popular credit than it receives, but the scholarly consensus would not agree with Friedman's assertion that its "roots" reside in Germany.

Second, on his main argument, the IMF is projecting that China's economy will surpass the U.S.'s (on a purchasing power parity basis) in just five years in 2016. The EU economy is already larger than the U.S.'s. and has blocked U.S. mergers (e.g., GE's attempted acquisition of Honeywell).

Yes Europe has problems, and yes China may be experiencing the Mother of All Bubbles. But for Friedman to argue that the U.S.'s relative power in the next decade will be anything like it has been over the past 20 years seems incredibly optimistic and naive. The U.S. would appear to be at a significant cyber-warfare disadvantage compared to China at present (Update: within a few hours of this post STRATFOR's website was hacked and private client data posted on the internet). The U.S. has also failed to demonstrate that it can keep the nuclear weapons genie in the bottle in potentially hostile parts of the world. China is developing its first world class navy in 600 years. In short, examples abound of the U.S.'s relative power weakening.

Friedman writes about the U.S.'s need for a regional strategy. One interesting and rarely discussed possible outcome of the fiscal crunch facing America is the potential for unprecedented regional infighting inside the United States. For example, how difficult is it to imagine Texans questioning whether their tax dollars should continue subsidizing Maine, Oregon and Vermont? Or Californians funding Sarah Palin's Alaska?

(click to enlarge)

This is the exact argument which is taking place in Europe right now between Germany and Greece. Yes, there are large differences between American and European social cohesion. But I would not be surprised to see growing regionalization within the U.S. as a key emergent theme in the years to come. In the absence of existential external threats the justification for an extremely powerful and centralized U.S. federal state is more open to question.

Overall, Friedman's chapter is written from the perspective of an all-powerful emperor and not from one bearing witness to the paralysis which has gripped Congress in recent years. I'm also not sure he has a firm grasp on some of the social-demographic shifts which are emerging nor the current economic/financial situation.

In short, this chapter seems more a treatise on how Friedman would prefer to see the world than how it actually is.

As the Euro Rolls Over, Why Hasn't Gold Rocketed?

In early May of this year, with the euro hovering in the $1.46-$1.48 range, I disagreed vehemently with euro bulls such as portfolio manager Axel Merk who argued that the common currency was no longer vulnerable to a sell-off (see Merk's May 11 FT article titled 'Dollar in graver danger than the euro' and my counter arguments here, here, and here). 

Merk's argument was basically that in 2010, when the euro sank to a low of $1.18, the currency served as a proxy for the sovereign debt crisis. Now, however, investors were shorting sovereign debt directly and, according to Merk, recognized that it is a lot harder for the ECB to print euros than it is for the Fed to print dollars.

For awhile, as you can see from the below chart, it appeared that Merk perhaps had made a good point. From May the euro has shown remarkable resilience; for the last six months one sovereign after another has white knuckled its way through uncertain debt auctions and ever higher interest expense. Meanwhile the ECB kept its 'bazooka' semi-holstered with purchases of sovereign debt apparently capped at €20 billion per week. While the euro did soften from mid-May onwards it was able to keep it's head above the $1.40 mark for the summer and a good chunk of autumn.

Click to enlarge

Continue reading the full article at Seeking Alpha here.

Video: Hitler Reacts to S&P's Downgrade of 15 Eurozone Countries