Negative signals flash in the bond market. Could hedge funds be loading up for a big bitcoin short? Amazon to disappoint in Australia – Are you kidding?

This week James Kirby and I discuss:

  • The continuing climb of bitcoin
  • It could go sky high, or it could drop to 0
  • Bitcoin shorting is on the horizon, but it could be the most dangerous thing you do 
  • ETFs are getting active, James and I drill down the (nerdy) differences between an active ETF and a LIC
  • 2 year bond yields drop below the US for the first time, a warning signal from the market
  • The market is now coming to the view that the Aus economy is going to be weaker than the US over 24 months
  • Essentially, the market is saying you can forget about wage rises for the immediate future
  • The head of Rio warns of weakness in China
  • People are going to be very price sensitive in coming years, so retailers will have to price sharply
  • Don’t be quick to poo poo Amazon, they’ll figure it out
  • Super fund conspiracy theories!
  • Don’t hold your breath for income tax cuts, because Malcolm can’t deliver
  • Retro tax tricks make a comeback 


Hello, I’m Alan Kohler, Publisher of The Constant Investor.

And I’m James Kirby, Wealth Editor at The Australian.

And we are The Money Café.

The Money Café.

Now, James, this time when we spoke last week Bitcoin was US$10,000 each, last week as we spoke.

Is that all?

It had just gone through 10,000, we kind of rabbited on about it, I think we called it the Mega Trend, and as we speak today it’s $14,000, it was $12,000 this morning at breakfast time, lunch time…

There you go, 40% in a week.

Well, indeed.

Wow.

Well, in fact it went down a bit so it was actually kind of 50% in a week.

Yes, it did, that’s right, it did roll under a little bit, yeah.  The interest is extraordinary, isn’t it, and it doesn’t seem to drop.  I know we had it as our BT Mega Trend of the week but I think on this remarkable occasion we’re going to have it two weeks on a row.

Not two weeks in a row, James.

Well, because I don’t know about you, Alan, but more people are asking me about Bitcoin than any other issue including the entire share market.

That’s because we’ve never seen anything like this before, I mean never.  It is so far beyond the NASDAQ bubble of the 90s, the Tokyo property bubble of the 80s, the tulip bubble of the…

No, it may not be beyond the tulip bubble but it remains to be seen.

Well, it is a bubble, it’s an amazing bubble.

It’s a bubble, yeah.

But the thing about bubbles is they often go much further than you expect.

Yeah, and so how high can it go?

I interviewed a bloke yesterday for The Constant Investor from Saxo Bank, Kay Van-Petersen, who used to be called the Global Macro Strategist for Saxo Bank.  Now he calls himself the Global and Cryptocurrency Strategist of Saxo Bank, so he’s changed his title to reflect his new interest.

They are probably seeing so much trading in that, in crypto.

He says Bitcoin can go to $100,000 each.

Yes, and I’m sure it can or it could pop tomorrow.

You’re sure it can?

I’m sure it can theoretically just like I’m sure it can drop to zero or at least not far from zero, because it could.  We could be here next week saying my god, what happened, it fell 40%.

While we’re on the subject of Bitcoin we got a question.

Let’s leapfrog to questions.

We usually get to the questions later but Nicholas has asked us about Bitcoin so while we’re talking about it let’s talk about Nicholas’s question.  He says with Bitcoin futures contracts opening up on the Chicago Board of Exchange – I actually think it’s the CME, the Chicago Mercantile Exchange, but anyway futures contracts are coming.  Will this make the market easier to access for Bitcoin sceptics who may heavily short the cryptocurrency and finally spook Bitcoin into collapse?

It’s a great question, Nicholas, and not only that but great minds think alike.  I write a column here for The Australian on Thursday afternoon and it happens to be about that very same subject.  So, Alan, I can tell you first of all that Nicholas is right.  Chicago Board of Exchange is the one that’s launching that.

It’s not the CME?

No, they both are.  Chicago Board of Exchange is launching on Sunday strangely, this Sunday the 10th of December, and the CME comes in behind on the 18th.  So, what it means is number one, that you can short Bitcoin.  That’s a big issue but more important than that the hedge funds can short Bitcoin.  The big money can short Bitcoin so that really is a very important development, assuming they do.

Well I reckon shorting Bitcoin would be the most dangerous thing in the world to do.

Boy, you’d want deep pockets.

The thing about shorting anything is that the losses can be infinite.

I know.

When you buy something long, that is you put your money into it, you can go down to zero but…

I suppose they can do very elaborate trades, pair trades and that sort of thing, that they could somehow offset the risk.  But it would be one hell of a short, wouldn’t it, because it seems to be on a relentless trajectory.

Imagine shorting Bitcoin at 14,000 and having to cover at 100,000.  Hello?

I know, well the chances are you’d have to cover.  That’s the way it seems at least but it means a couple of things, it means there’s liquidity in the market that hasn’t been there before and I think it also means what we were saying about what is the Mega Trend of the week is that it’s sort of like the institutionalisation of Bitcoin.  By that I mean it moves from being the wild west and day traders into the main offices of Wall Street.

It’s interesting, isn’t it, because when we started these Money Café podcasts what was hot at the time was ETFs, what we were talking about was ETFs were hot.  Money was pouring into ETFs and we were worried about whether ETFs were going to be a problem and all this stuff.

Yeah, swamp the world.

And now ETF is forgotten, who cares about ETFs.

No, the money is still pouring into ETFs but I tell you, maybe the SEC might review the whole thing about the Winklevoss twins.  If you remember one of the big black spots, if you like, for Bitcoin this year was when the Winklevoss twins wanted to do an ETF for Bitcoin and the American SEC said no.

Yeah.

They have since had sweet revenge on everybody by becoming billionaires, but you’ve got to think they might come back.  I mean if you can have a derivative why can’t you have an ETF?

On the subject of ETFs you wrote a column this week about active ETFs.

I did, yeah, I just wanted to…

You’d better explain what an active ETF is versus a passive one.

Well I think I just want to make it clear to most people who think ETFs are passive, who think that ETFs are indexed, that you’re buying an index.

Well, most of them are.

Yeah, well they were traditionally but a lot of the…

You can get active ones now.

Well, a lot of the new ones are active, more and more, and not only are they active – now, when I say active what I mean is they have their own rules, they don’t mirror the index and they start making decisions.  They start making little decisions and that’s active, that’s managing just like a managed fund.

Tell us what the difference between an active ETF is and a listed investment company, a LIC?

There may not be an enormous difference actually.  This is the thing, that they’re all morphing and…

Okay, sorry, because the important difference is that a LIC is closed.

Yeah, okay, a LIC is closed.  Yes, sure.

A LIC is closed, active ETF is open so that as the money goes into an ETF the owner of the ETF has to buy assets whereas with a LIC if there’s more demand than supply it goes to a premium over the net asset value.

Yes, it does.

And if there’s less demand than supply it goes to a discount but the premium and discount thing can’t happen with an active ETF.

No, it can’t.  But, I think the important thing is that people who think that it’s a binary thing, that there’s managed funds and then there’s ETFs it doesn’t work like that anymore.  These new ETFs, they have performance fees.  I just mentioned one, the Beta Shares launched one during the week, active ETF hybrids, 15% performance fee on that one.

Yeah.

People probably buy ETFs to get away from performance fees.  So, got to tell you folks, they’ve managed to work fees into ETFs, maybe that’s the story.

Just so you know, I’m a big fan of performance fees.

You’re a big fan, I imagine, of…

Well, I’m a big fan of performance.

Yeah, performance, that’s what I would have thought you might have been saying. 

I’m a fan of paying for performance.

Paying people for performance, yeah.

Yeah, so I don’t think there’s anything particularly wrong with performance fees, is all I’m saying.

No, but it’s a new question isn’t it, whether you pay people for performance with an ETF or they just set their algorithms and walk away.

As long as they don’t do that, I don’t want to pay for that.

Well, you might be paying for that.

If they’re setting algorithms and walking away then it’s 20 basis points, 0.2% thanks very much.

Yeah well there you go, if you want to know what it is it’s 15% adjusted performance fees on some of these new ones.  Anyway, a point worth making, I thought, and people should know about it.  What else have we got on the agenda today?

Well you’re interested in two year bond yields, which in Australia have dropped below the US for the first time now, tell us what that means.

Yeah, well it’s got a bit lost in translation, this.  Did you know that for 17 years, way back to 2000, Australian bond yields were higher than the US so that meant that money was coming into Australia, international money was coming in and propping up our government in some ways, propping up our economy, because we had high bond yields and they had low ones in the US.  That was quite good for us in many ways and that’s changed just this week.  The two year – and it’ll happen to all of them I imagine sooner or later but just for what it’s worth the two year, which I have here on my iPad on a chart which I think is 1.79 or so, it’s 1.76.  When you have a situation where American bond yields are doing better than our bonds the money is going to flow back out of our market.  That’s an important development for everyone.  It’s just kind of a technicality but it means a lot.

Well, I think you’re right, James, it’s a really interesting point and I suppose that…

What do you think about the currency, what do you think it might do on the dollar?  Have you got any ideas on that?

Well, I mean it should if – I showed a graph on the ABC news this week showing the interest rate differential versus the Australian dollar and the two graphs have diverged.  The dollar should really be quite a bit lower now as a result of the decline in the interest rate differential.

Our dollar should start to drop.

You’ve pointed out the interest rate on two years the differential is zero, or negative.  In fact, the dollar should be quite a bit lower but it’s not.  The reason the dollar is not falling as a result is because the iron ore price is going up and is now above US$70.

It is.

There’s this kind of push pull going on between commodity prices, in particular, iron ore, and the interest rate differential which is declining.  But, a more interesting fact or question is why is our interest rate now on long bonds, medium term bonds, below the US and it kind of gets back to this week’s GDP number, national accounts which came out yesterday.

And were flat.

And were flat, and so the market is now coming to the view that over the next two years the Australian economy will be weaker than America’s.

Yeah, and the other thing is if we’re depending on iron ore prices well it’s not as volatile as Bitcoin but gee, it’s volatile and it bounces around.

Yeah.

I mean it wasn’t that long ago they had it in the budget at $45, that’s what it was in the budget for, the federal budget, and now it’s $70.  But the head of Rio this week, Jean Sebastian, said he was worried about the next six months in China and he was expecting a softness in the first six months next year in China.  That’s pretty important when you hear someone, the head of Rio, they know.  They have an inside track on China.

Yeah.  But I suppose the interesting thing is that bond yields tend to work not so much off growth but off inflation and growth to the extent that it affects inflation.  I think that what we saw yesterday in the national accounts was that the growth is coming from exports, from business investment government spending and the household consumption is very weak.

Very weak.

Now, those things that are strong, that are holding Australian growth at 2.5% to 3%, are not inflationary.  It’s really household consumption that results in inflation.  Wages growth is low, demand from consumers is not strong at all and so I think that the market is saying inflation in Australia is going to be weak for a while.

Yeah, it is saying that.  You know, even the savings rate went up, it went up.

Yeah.

I mean go figure.  It notched up from 3 to whatever, 3.25, but that’s the last thing you thought might be happening.  So, you really don’t need the saving rates going up especially if you’re in retail stocks.

No, that’s right.

And we talk about retail stocks – I mean just putting Amazon to one side, we’ll talk about Amazon in a moment, but before you even mention Amazon, good lord the savings rate is going up, consumption is going nowhere, no one is getting a wage increase, no one.  So, where on earth is spending going to come from?

Yes, and what spending there is, which won’t be much, is increasingly going to go to Amazon.

Yeah, well it’s going to go where people can get the cheapest stuff.  I mean it’s going to go to Aldi, it’s going to go to Amazon, I mean people are going to be very price sensitive.  I mean if your salary isn’t going up you’re going to start concentrating on what you can save.

Did you buy something on Amazon this week purely for research purposes?

No, I didn’t purely for research purposes, I did look at a very good piece by Chris Griffith in The Australian, and he went and looked at all the prices and he was finding prices on Amazon that were dearer than in the shops downtown.  I expect they’ll sort all that out but on day one anyway…

Yeah, I spoke to a retail analyst this morning and he pointed out that Aldi started in 2001 with one store and everyone went poo poo to it and said no, they’ll never do any good, they haven’t got a fresh offer, all these reasons why they’re not going to go any good.  16 years later they’ve got 10% or whatever it is of the market and they’re doing fine.

Yes, and Amazon will do fine.

And Amazon will be faster than Aldi, probably.

Yeah, they will of course because they don’t have to build a shop, they don’t have to build the supermarkets and I think they’ll be superb on this sort of stuff, of targeting where they’re being beaten on price by JB Hi-Fi or whatever so I know JB Hi-Fi went up 6% on the day which was really interesting.  So, some people really believed Amazon wasn’t as good as they thought it was going to be, it was on the day. 

These investors, honestly, they’re just so short term focused.  So, Amazon didn’t have a big launch, some of their prices weren’t that great, buy JB Hi-Fi.

I know, I mean that’s the market, Alan, it’s a nice big lively market, that’s why we love it.

What I would have liked to be doing is to be in a position to sell to those people.

Yes, well someone did.  We had more questions, we have some interesting questions this week.

We had other questions.

You’ve already dealt with the chap who was on the line from Rotterdam.  Isn’t it nice to know we have listeners all around the world?

Well, exactly, and this is from Alex.  Hi guys, love the podcast and The Constant Investor generally.  I listen every day to one piece or another on my fast train commute between Rotterdam and Amsterdam.  How good is that?

It’s terrific.

So, hello Alex.  Question for Alan, what is the update on your idea of having the future fund as a national default super fund?  Maybe now the idea has more traction given that the Banking Royal Commission will focus on industry super and there may be changes ahead for industry fund board makeup.  Well, I have to be honest with you, Alex, I don’t think they will ever make the future fund the national default super fund, which is what I think should happen.  Because that would involve nationalising the entire industry which probably won’t occur at least by a Coalition government.

It probably won’t occur but I heard a fascinating conspiracy theory from a very senior person in industry funds the other day and I said strangely enough, Alan, in this café with said person, I said what was Peter Costello up to?  I said what was he up to, what was the great Liberal Treasurer of our time up to suggesting a nationalisation of the savings fund.

He got that idea off me because I met him at a party, by the way, and I told him my idea.

Peter?

Yeah, Costello, and I bounced my idea off him.  He said that’s a good idea, and bugger me, he writes into the paper.

He tried to follow it up.

And claimed it as his idea.

So, I said what do you think Peter Costello was doing when he stole Alan Kohler’s idea, and he said, this industry fund said the money is flowing to industry funds anyway and the only way they can get it back is through the future fund.  It was an interesting conspiracy theory.

Yeah, well sure.  I mean don’t forget Peter Costello runs the future fund.

I know, but boy, no one supported him, no one, everyone ran for cover, no one wanted to hear about it, the idea.

That’s right.  But, it’s interesting.  Part of the point that I was making was that the future fund is the only fund in the country that the Coalition likes.  They hate the industry funds and they hate the banks.  No one likes the banks anymore.  That’s it really, so all of the super funds in Australia are either industry funds or banks and…

That’s right, and everyone hates them.

Well the Coalition…

Well they both have issues that’s for sure.

The trouble is we’re too far down the track in a way and it’s no good turning the future fund into just one other default fund, it’s got to be the default fund or nothing at all.

Yeah, well unfortunately to our man on the train from Rotterdam to Amsterdam it doesn’t look like it’s going to happen any time soon but great to hear we have a listener in…

Just further on Alex’s question, he says that the Banking Royal Commission will focus on industry super, I just point out that actually the terms of reference don’t specify industry super, they specify or they talk about superannuation and insurance.

We hope it isn’t a witch hunt on industry funds.  They couldn’t possibly investigate super and not investigate industry funds.

Well, the thing is the Coalition might want a witch hunt on industry super but Ken Haynes, former High Court Judge, will do what he chooses to do.  The terms of reference, say superannuation, he could well spend his entire time looking at bank superannuation funds and I’d say there’s a fair chance he will.

He may.  He might also look at to what extent is money flowing into the trade unions from industry funds?  I mean the IPA are putting out numbers and you’d have to take them with a pinch of salt because the IPA numbers would be so loaded.  But it’s indisputable that money flows to trade unions directly from industry funds and maybe a lot of people don’t know that, maybe people who may not agree with it either, having their super going that way.

Yeah, so another question for you, James.

What’s the last question, we’ve got one more?

I’m about to ask you a question.

I’m looking forward to it.

From Clinton.

Yes.

Not Eastwood, but there has been much talk around the government providing personal income tax cuts for most people.  Can we afford them and what effect will they have on the broader economy?

Well, Clinton, I’ve got to tell you I wouldn’t be waiting for those.  That was Malcolm in one of his more desperate moments, Malcolm Turnbull, talking about them.  The fact is that if the Coalition win, in the unlikely event they win, tax rate is going to be 47.5 because they’re going to lift Medicare by a half, that’s going to bring it up 2.5.  If Labor win the tax rate is going to be 49.5 because they’re going to keep the Medicare expansion to 2.5 and they’re going to bring back the temporary deficit levy.  So, you’d have a top rate of tax of 49.5%.  So, I can’t see how anyone is cutting tax, economically I can’t see it and politically I doubt it actually.  What do you reckon?

Malcolm said they will, are you calling him a fibber?

No, but I’m saying he can’t deliver, we know he can deliver very little except, unfortunately, things that Labor wants.

He’s going to cut company tax, he’s going to cut your tax and my tax, taxes down.

Well, I tell you what, bring it on with 47.5 or 49.5 as the choice it’s creeping up there.

Sure, that’s right.  Well, there’s a lot for them to spend money on, isn’t there, I mean let’s face it.

Absolutely.

And they’ve got a deficit to deal with.  Yeah, I’m in furious agreement with James here, I think it’s slightly unlikely that the tax cuts will arrive.  If they do arrive, no, we can’t afford them and the deficit will get larger and someone else will pay in the future for it, so there you are.

That’s it.

Is there any other – new tax products are flourishing in the wake of super tax clamp down, that’s on your list.

One last thing, yes, now that we talk about these high rates of tax I just thought it was interesting.  I talked to financial advisors during the week and they make the point that with these very high tax rates coming down the line, with super being totally shrunk as a tax technique, all this old fashioned stuff that people have not talked about for years is coming back into action.  Gearing in shares for instance, insurance bonds, there have been what they called menu upgrades for all the financial advisors that are going back on the lists because they’re tax breaks.  So, I think one of the things we’ll see next year is new focus on tax breaks outside super down the line.

Okay, well there you are folks, you heard it here first.

You heard it here first!

I was going to put on my list, Rupert Murdoch selling out of Fox.

Yes.

I’ll just make this point about this, because on this podcast, folks, we don’t want to upset Rupert because he’ll give us the sack.  However, there has been an official kind of story about that subject in the Wall Street Journal which Murdoch owns.

Yes, indeed.  So you’ll have to expect…

So, there it is.  It’s official.

And what did it say?

Well, it said that the bloke who runs – what’s his name, the bloke who runs Disney rang up Rupert…  Bob Iger rang up Rupert to say what about selling Fox to us and Rupert said sure, let’s talk, and they had a meeting.  They’re talking about it and the story went on about how three is a crowd in making decisions.  There’s Lachlan, James, Rupert, it’s all a bit messy, there’s too many of them.  Maybe it’s time to split it up and then James wants a job in Disney.

Well, there you are.

There you go, folks.

We’ll keep all that in mind, won’t we?  Okay, thank you, Alan, for that.  I think that might bring us to the end of our menu today, does it?

And don’t forget you can subscribe to The Money Café on Apple Podcast or your app of choice.  While you’re there it’s always helpful if you can leave a rating or two, and it helps listeners to find the show.  Send a question and we’ll answer it next week, e-mail the question to hello@theconstantinvestor.com and next week will be our final episode for the year so if there’s anything you’ve been dying to ask get in quick and we’ll answer them all before we go away.  Until them I am Alan Kohler, Publisher of The Constant Investor.

And I’m James Kirby, Wealth Editor at the Australian.

Talk to you next week.