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in looking at your latest monthly investment outlook you say be careful in 2018 and one area that certainly requires caution is Bitcoin tell us first what your Reed is on bitcoins relentless search - sixteen thousand past sixteen thousand sure well Bitcoin search depends upon its potential for replacement or or else quite incidental use of the Bitcoin as a medium of exchange a dollar based type of currency and you know for Bitcoin to do that first of all has to gain momentum and popularity it has to serve as a medium of exchange in a store of value neither the store of that you the price has gone up and so obviously there's been some value there but sooner or later it will go up and down and the volatility itself may you know inhibit Bitcoin from being a currencies such as the Euro or the dollar in addition you know the medium of exchange that Bitcoin hopes to fulfill you know it has a problem because there's only going to be 21 million of them and they're priced at fifteen sixteen thousand dollars a unit and so you know buying a bag of groceries at the grocery store with a Bitcoin that's going to be a little difficult yeah I love how you always can bring it back to to concrete uses here what does bitcoins moves tell us about the state of financial markets global financial markets then well you know the the roots I think are based upon an expansion of money and an expansion of credit by the central banks that's been ongoing for six or seven years you know central banks are still writing cheques and in terms of you know buying bonds and buying corporate bonds the ECB is doing that the Bank of Japan is doing that still at about a trillion dollars a year although the Fed is not only cut back but is now reducing their supply but this expansion of credit you know perhaps 10 11 12 trillion dollars over the past six or seven years is really the you know the foundation for Bitcoin and the foundation for other Mis pricings and artificial pricings of not only bonds that are negative yield but stocks at high p/e ratios is it in a bubble bill and I ask because I wonder if it isn't a bubble and it does pop what's going to be the spillover effect into other asset classes into bonds into stocks into currencies well you know the going up doesn't seem to have affected asset prices and bonds significantly anytime any bubble pops however it's an indication that you know something else may follow and so I I think it pays to be cautious in terms of you know not only buying it but following it as it moves up and then potentially moves back down so when bubbles pop whether they're small and relatively insignificant in terms of the total credit of of global credit you know I think it's a potential 4runner for other assets and so you know investors should be careful and this is a great point actually both because you highlight this in your investment outlook when you look at the difference between cash and credit and say look when we start to see investors turning more to cash versus on cash equivalents over credit then there's the potential here for some kind of liquidity breakdown in the system and and that's actually how you mentioned Bitcoin is one of those cash equivalents is that the prism upon which investors should be looking here at bitcoiners perhaps that divergence now between cash and cash equivalents and and credit yeah I think investors of well investors are looking at it as an investment at the moment as a amania that's a fulfilling you know upward and upward price movements and so it's not really a currency alternative at the moment but with low interest rates and in many cases you know four to five trillion dollars worth of negative interest rates ultimately investors and I'm talking about small investors I'm not talking about institutions that have to invest at negative interest rates but small investors have a choice and they can go to cash and they can go to the mattress or they can go to Bitcoin and so you know that perhaps is the you know the foundation for this movement not necessarily at 16,000 or $17,000 of Bitcoin but maybe at its beginning you know down below $1000 makes total sense and I also want to talk about what you said about Carrie or more specifically the cost of Carrie and people looking at the return they're chasing here versus how it compares to whatever benchmark it is that they're looking at hearing and you talk about the idea that we may be reaching a turning point here and that's why you need to be more cautious give us a sense of why you think we're at some kind of turning point here and how you define being more cautious how do you trade that specifically well thank you for reading that investment I look very thing and it's true that you know any investment other than a Treasury bill has carry attached to it a Treasury bill doesn't have any volatility doesn't have any risk and so you know it's an on carry instrument but anything that has risk has volatility it basically has a carry or a higher return attached to it when interest rates are lower in many cases negative around the rest of the world then carry itself becomes at risk because the the instrument against which it's compared Treasury bills and you know basically is selling at a very very low yield and so investors should be cautious going forward because carry whether it's in high-yield bonds or stocks and p/e ratios or any other type of investment carry itself is priced based upon that rock-solid Treasury bill that basically yields very little and so as the Fed raises interest rates then carry itself or any risk investment becomes at risk every investor that comes on here that's investing in emerging markets in particular here says look just given where the feds likely to take rates here they're not expecting too much strength in the US dollar either actually emerging markets this time around can be resilient do you push back against that principle even in emerging markets let's say specifically you know I think emerging markets have a higher growth potential and it's in the developed countries certainly United States where interest rates are being raised Brazil just lowered its interest rate to near cyclical record of 7% they used to be 13 14 15 percent so you know many emerging countries are moving the other way in terms of lower interest rates while developed countries certainly the United States is moving higher in terms of yield you know at some point the Fed Funds rate to my way to thinking you know it's going to approach 2% and I think at that point investors should be cautious because the the leverage that's inherent in the United States and other developed countries you know argues for caution as we move higher and yield so 2% to my way of thinking should be a medium-term cap for the Federal Reserve yes bill finally I want to ask you about the yield curve you've talked about it in the past we've seen the relentless flattening of the yield curve whether it's the twos 10s or the 5s 30s it's not quite the reliable recession indicator that perhaps it once used to be a lot of people say that do you think it's a symptom of slowing growth or will it be a trigger for a slowdown in growth well I think the real trigger is the the short-term rate and in the pack flat curve or even a negative yield curve it's been the central bank that's been raising short-term rates much more than fives and tens and that's what produces the flat curve in in a sense the forward markets are anticipating that the Fed will at some point lower interest rates from the current level so I think the real indicator to look at would be real Fed Funds or nominal Fed Funds kind of closer to two percent at that level it's close to a two-year it's close to a ten-year and at that level it's the 2% short rate not the 10-year at 235 that threatens the economy going forward so the Fed should stop soon or else the economy will slow down how confident are you that the Fed gets it right and doesn't go above - well I'm not you know I've been arguing against the the expertise of the Fed for a long time because they're based on models you know the tailor modeled Phillips curve etc etc and I think to a certain extent even though we may have a new regime going forward that as long as they're modeled based on historical you know types of cyclical indicators as opposed to structural changes like demographics and and credit creation then you know there may be problems so I'm not not confident in the academic approach to Fed Funds in its entirety
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