ISSUE 04 VOLUME 01
SEPTEMBER 2015
The IMF, SDRs, and the
Global Currency Reset
Exactly what backs ‘SDRs’… FinTech companies set to disrupt the finance sector…
And the incredible encryption technology behind a controversial product…
Jim Rickards, Strategist and Shae Russell, Editor
The International Monetary Fund (IMF) is one of the most powerful institutions in the world. It acts as
the de facto central bank of the world, making loans to countries in distress. The IMF raises funds from
its member nations, and issues its own world money called the Special Drawing Right, SDR.
It acts as the regulatory and policy arm of the Group of Twenty. The G20 is a multilateral club that
includes both the richest nations in the world (US, Japan, UK, Germany, Australia, etc.), and the most
populous emerging economies (China, India, Brazil) among others.
The G20 has no permanent staff or bureaucracy so it outsources policy tasks to the IMF. The combined
role as the world’s central bank and the G20’s eyes and ears makes the IMF the centre of gravity for
policy in the international monetary system.
Yet, for such a powerful institution, the IMF is incredibly opaque and unaccountable. My favourite
way to describe the IMF is ‘transparently, non-transparent.’ What I (Jim) mean by that is the IMF is
transparent in terms of making resources
available for interested parties to learn about
IN THIS ISSUE
what it is doing.
Holding China’s Ambitions Hostage.............. 5
The IMF website is loaded with links to position
It’s Time to ‘Uber’ the Big Banks..................... 7
papers, financial statements, and facts and
figures about its missions and personnel.
Creditworthy Borrowers
The IMF publishes a value for the SDR every
to the Front of the Line.................................... 8
business day. Even the IMF’s plan to replace the
Understanding the Blockchain.....................10
dollar with SDRs as the global reserve currency
is available.
http://portphillippublishing.com.au/rsi/
The problem is that all of this material is
written in highly technical jargon that requires
Please e-mail us at:
[email protected]
with your feedback.
1
specialised training to interpret. That’s where the
‘non-transparent’ part comes in. Reading the IMF
website is like picking up an advanced textbook
on quantum physics. You may be able to read the
words in a row, but unless you have specialised
training, it might not make much sense.
Deciphering the jargon
Where is such specialised training available,
and who has it? There are a number of fine
schools teaching international economics,
but the leading centre of learning for working
at the IMF is undoubtedly the School of
Advanced International Studies (SAIS) part
of The Johns Hopkins University located in
Washington, DC.
SAIS offers graduate programs in international
economics as well as American Foreign Policy,
area studies, languages, and other courses
in diplomacy, intelligence and strategy. It has
many distinguished graduates including former
Secretary of State Madeline Albright, and CNN
anchor Wolf Blitzer.
In addition to its graduates, SAIS has an
outstanding faculty including many visiting
scholars drawn from Washington DC policy
community. Former Secretary of the Treasury,
Hank Paulson, was in residence at SAIS after
leaving the Bush administration.
For purposes of understanding the international
monetary system today, the two most important
SAIS connections are former Secretary of the
Treasury, Timothy Geithner, and former head of
the IMF, John Lipsky.
Geither is an SAIS graduate and Lipsky is a
visiting scholar at SAIS today. Geithner (who
worked at the IMF before joining the Treasury)
presided over the aftermath of the Panic of
2008, and was one of the architects of the
IMF/G20 process that started the currency
wars in 2010.
Lipsky ran the IMF in the dangerous period after
the abrupt resignation of IMF head Dominique
Strauss-Kahn amidst a sexual-assault scandal
in May 2011. Lipsky performed a crucial role in
organising the first bailout of Greece after the
sovereign debt crisis erupted in 2010. When it
comes to global bailouts and their aftermath,
the imprint of SAIS through players such as
Paulson, Geithner, and Lipsky is everywhere.
Former U.S. Treasury Secretary, Timothy Geithner (left)
is a graduate of the School of Advanced International
Studies (SAIS) in Washington, DC. Former head of the
International Monetary Fund John Lipsky (right) is
currently a Distinguished Visiting Scholar at SAIS
Fortunately, the readers of Strategic Intelligence
have their own SAIS connection. I graduated
from SAIS in 1974, just after Wolf Blitzer, and a
decade ahead of Tim Geithner. For all intents
and purposes, SAIS is the intellectual boot camp
for the IMF. Many SAIS graduates go directly
into the IMF. Other leading career choices are
banking, the Foreign Service, and the national
security community.
My class marked a turning point. Many
observers believe the gold standard of Bretton
Woods ended on August 15, 1971 when
President Nixon gave his surprise speech
shutting the gold window. (You can view that
speech here.) That’s not quite correct. Nixon
ordered the conversion of dollars into gold to
be ‘temporarily’ suspended. It was expected
that the world might be able to return to some
kind of gold standard once new parities of
paper money to gold were established.
Of course, you know that never happened. In
1975, the IMF declared that gold was dead as
a form of money. Yet, from 1971 to 1974 the
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world of international finance still considered
gold to be money. That’s when I received my
technical graduate training. Mine was the
last class to study gold as a form of money in
international finance.
spilled on the topic of including the Chinese
yuan in the so-called ‘basket’ of currencies that
make up the SDR.
The technical nature of SDRs has led to illinformed speculation, hysteria, and dire
forecasts that have no basis in reality. This is not
surprising. Most of the people who are experts
on SDRs actually work at the IMF or Finance
Ministries of IMF member nations. They have no
interest in commenting publicly about what is
really going on.
Most of those who are commenting lack
the expertise to know what they are talking
about. This is why the blogs are filled with
misinformation, and hyperbole that only serves
to alarm and confuse investors.
Your strategist as a 23-year old graduate student in
international economics at The School ofAdvanced International
Studies, class of 1974. This was the last class to study gold as a
monetary asset in international reserve positions
Today, for the first time in decades, gold is
once again being discussed as an international
reserve asset. This is because Russia, China,
Iran and other nations have been acquiring
thousands of tons of gold to add to their
reserves. Equally important, other central
banks that already have gold such as Germany,
France, Italy and the US have completely
stopped selling.
It looks like the scramble for gold is back after
decades of official dumping by the central banks.
Why the news on SDRs is
all informed speculation
Another topic that is in the news is the role of
the SDR. Financial blogs and newsletters are
filled with dire prognostications about how the
SDR is poised to replace the dollar as the global
reserve currency. Even more digital ink has been
There are almost no sources readers can turn
to for experts willing to discuss these matters
publicly. Fortunately, at Rickards’ Strategic
Intelligence we specialise in these topics in
way that is accessible. Readers should think of
Strategic Intelligence as their ‘go to’ source for
the most timely and accurate information on the
IMF and SDRs.
SDRs are the coming reserve currency of the
world. Massive issuance of SDRs in a future
liquidity panic will be highly inflationary. These
outcomes have enormous implications for
investors with assets in US dollars. Yet, the
process will be gradual and proceed in ways
that markets barely notice, at least at first.
Commentators who ‘cry wolf’ about SDRs are
doing a disservice to investors because markets
may be complacent by the time the wolf actually
arrives. To understand what’s at stake, let’s start
with the basics of SDRs. Then we can move to
the more complicated machinations involving
China and the US dollar.
What is an SDR? The answer is surprisingly
simple. It’s world money, printed by the IMF,
and handed out to member countries. It’s just
3
another form of fiat currency like the dollar
or the euro, not backed by anything. The only
thing that’s slightly different is that the SDR can
only be used by countries, not individuals. But,
countries can ‘swap’ SDRs for dollars or euros
(using a secret trading facility inside the IMF).
Ultimately SDRs can be spent in private
transactions once the swap is made. This is
why printing SDRs has the same inflationary
potential as printing dollars or euros.
Many people want to know what ‘backs’ SDRs.
The answer is nothing. Lots of commentators
believe SDRs are ‘backed’ by a basket of
currencies (dollar, euro, sterling and yen).
But the basket exists solely for the purpose
of calculating the value of an SDR. As of
September 4, 2015, the value of 1 SDR was
$1.40, however, that value has fluctuated
between about $1.35 and $1.60 in recent years.
The SDR is like other floating rate currencies in
that regard. The basket is used to calculate its
floating exchange rate against freely convertible
currencies, but otherwise has no purpose. There
is no segregated account of hard currencies
‘backing’ the SDR.
SDRs aren’t new. They were invented in
1969 and have been issued in large amounts
between then and now. The IMF printed
SDR9.3 billion between 1970 and 1972. The
next issuance was SDR12.1 billion between
1979 and 1981. After 1981, there was no
issuance for almost thirty years. Then in 2009
the IMF issued SDR182.7 billion in two tranches.
The total issuance to date amounts to SDR204.1
billion, equal to about $285 billion at current
exchange rates.
In case of emergency…
SDRs are not issued for bailouts or solvency
purposes. They are primarily a liquidity tool.
SDRs are issued at times of global financial
panic when investors are dumping assets and
scrambling for cash. This is demonstrated by the
dates of actual issuance.
The 1970-1971 issue coincided with a run
on Fort Knox and Nixon’s closing of the gold
window. The 1979-1981 issuance coincided
with hyperinflation and loss of confidence in the
dollar. The 2009 issuance was part of the G20
global rescue package in the aftermath of the
panic of 2008.
SDRs are not issued lightly or frequently. They
are brought out by the power elite when it
looks like the international monetary system is
crashing around them. The next time a financial
panic starts it will be bigger than the central
banks because their balance sheets are already
stretched from the last crisis. That’s when you’ll
see the world flooded with SDRs.
SDRs are not just used as money. They can be
used as a form of credit also. The IMF keeps its
books in SDRs. When the IMF borrows money
from a member country like China, it gives
China a note denominated in SDRs. When the
IMF lends money to a bankrupt country like
Ukraine, the loan is also denominated in SDRs.
Of course, Ukraine can quickly convert the SDRs
into dollars using the IMF swap desk, but that
just means another IMF member ends up with
the SDRs in its reserve position. The activities
of the swap desk are kept secret, but an
examination of central bank reserve positions
relative to prior SDR issuance reveals where the
SDRs are going.
Right now, China looks like the biggest buyer
of SDRs — just as it is the biggest buyer of gold.
For China, these are all just backdoor ways of
dumping dollars without disrupting the US
Treasury market directly.
This brings us to the current interaction among
the IMF, China, and the US with regard to the
inclusion of the Chinese currency, the yuan, in
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the SDR basket along with dollars, euros, yen,
and sterling. The current basket is weighted
at 37.4% euros, 41.9% dollars, 9.4% yen, and
11.3% sterling.
Given the importance of China as the world’s
second largest economy, at about 14% of
global GDP, and the increasing use of yuan in
trade settlement and finance, it is striking that
the yuan has not yet been included in the SDR.
Holding China’s ambitions
hostage
The decision to include the yuan in the SDR
basket is part of a larger power play between
China and the US. Since 2009 China is one
of the biggest lenders to the IMF. In contrast,
the US has refused to fund its IMF lending
commitments made at the G20 Pittsburgh
summit that year. The IMF has offered China
greater voting rights commensurate with its size
in the global economy, but the US has refused
to approve that change.
In effect, the US is holding China’s IMF
ambitions hostage in order to force China
to avoid cheapening the yuan. This strategy
worked fairly well through most of 2014 and
2015. The yuan held steady at about 6.2 to
$1.00. US complaints about the Chinese as
‘currency manipulators’ died down.
The problem was that in order for China to
maintain the peg, it had to sell dollars and buy
yuan in the markets. This was a form of monetary
tightening because when a central bank buys
its own currency, it reduces the money supply.
China had to tighten because the Fed was
talking tough about raising interest rates, which
made the dollar stronger. If the dollar got
stronger, and the yuan was pegged to the dollar,
the yuan got stronger too. This contributed to
the slowdown in the Chinese economy.
Finally the pressure on China became too great
and they broke the peg to the dollar on 11
August, 2015. This unleashed a wave of instability
and uncertainty around the world, which led
to a crash in US stocks. In effect, the Fed’s tight
money talk went around the world via China,
and returned to US shores in the form of a stock
market correction. That’s how things work in a
tightly connected globalised financial system. This
will not be the last episode of such contagion.
The Chinese currency turmoil has coincided
with a temporary delay in the final IMF decision
to include the yuan in the SDR basket. Many
newsletter writers had predicted the ‘end of
the dollar’ in October 2015. That’s when they
expected the yuan decision to be made.
An October decision was never in the cards.
There is an IMF annual meeting in October
(in Lima, Peru this year, October 9 – 11), but
that’s not when decisions are made on SDRs.
Those decisions are made by the Executive
Board of the IMF. The Executive Board calendar
is discretionary, but the original deadline for
determining changes in the SDR basket was
December 31, 2015. The matter was set for
review by the Executive Board in November or
possibly early December.
On July 29, 2015, the Executive Board decided
to push the deadline for a change in the SDR
basket from December 31, 2015 to September
30, 2016. The technical reason given for this
change had nothing to do with China, but had
to do with the difficulties SDR index investors
faced in trying to rebalance their portfolios on
New Year’s Eve when liquidity is scarce.
While these technical reasons are legitimate,
there is certainly more to the story. It is highly
likely that China gave some advance warning to
the IMF and the US Treasury of its plans to break
the peg to the dollar, although these warnings
were kept secret. China needed space to adjust
the yuan and get out of the straightjacket
5
imposed by the US dollar peg. Moving the SDR
adjustment date back nine months was a way to
give China that space.
The yuan will be allowed
into the SDR
Again, many analysts misinterpreted this
sequence of events. Looking only at the headlines,
many assumed that the IMF had decided not to
allow the yuan into the SDR, and that China had
retaliated by cheapening its currency.
Both assumptions are incorrect. The yuan will be
allowed into the SDR, it’s just that the process
has been elongated. China’s devaluation was
not retaliation, but a necessary adjustment to
the Fed’s disastrous strong dollar policy. These
policy moves are of the utmost importance to the
functioning of the international monetary system.
They don’t happen out of spite. These moves
may surprise markets, but they are carefully
worked out behind the scenes. The elites see it
coming; the everyday investor does not.
Where do we go from here? The conventional
wisdom now is that the yuan issue is dormant
and there will be no activity until September
2016 at which point the yuan might be included
in the SDR. Again, the conventional wisdom has
it wrong. Here is the actual expected sequence
of events:
November 2015 – The Executive Board will take
a formal vote to extend the effective date for
revising the SDR basket to September 30, 2016.
Some favourable references to China’s progress
toward inclusion will be made.
March 2016 – The Executive Board will formally
vote to include the yuan in the SDR. It will
be given a weight of about 10%. This means
that the weight of the dollar will be reduced
somewhat; sterling is also likely to be reduced
to make room for the yuan.
September 30, 2016 – The new SDR basket,
including the yuan, will become effective.
Portfolio managers will use the time between
March and September to rebalance their
portfolios without disrupting currency and asset
markets in the process.
The important thing for you to note about this
timeline is the distinction between the decision
date (March 2016) and the effective date
(September 2016). That’s a distinction that other
analysts have not realised yet. It means that the
yuan/SDR story will be back in the headlines
much sooner than many expect.
None of this has anything to do with the
issuance of new SDRs. That’s something that
will be kept on the shelf until the next liquidity
crisis. The idea is to include the yuan in the SDR
basket soon so when it comes time to issue new
SDRs, China will have a seat at the table as a
member of the SDR ‘inner circle.’
Only at Strategic Intelligence will you find this level
of detail and accuracy on SDRs. The implications
for investors are profound. From now until next
March, China has a free hand to weaken the yuan
somewhat further. That will put more deflationary
pressure on the US, make the US dollar stronger,
and lead to added turmoil in US equity markets as
earnings suffer due to the strong dollar.
Beginning next March, that process will reverse as
portfolio managers lighten up on dollar exposure
and increase yuan exposure to rebalance their
portfolios ahead of the September 30, 2016
deadline for the global currency reset.
Meanwhile, China continues to acquire gold
and SDRs to diversify away from the US dollar.
This is all part of China’s preparation for the
next global liquidity crisis. When that strikes,
probably by 2018, there will be massive
issuance of new SDRs with both the US and
China in agreement. That will finally unleash the
inflation that markets have feared since the Fed
began printing money in 2008.
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The inflation the Fed failed to create will finally
be created by the IMF using SDRs as the new
global reserve currency.
This process will be complicated and prolonged.
At Strategic Intelligence, we will be watching
it every step of the way and keeping readers
ahead of the curve.
It’s Time to ‘Uber’
the Big Banks
In Silicon Valley, there’s no higher praise one
technologist can give another than to call her
a ‘disrupter.’ The term refers to technology
platforms that are not just new, not just better,
but that completely disrupt existing business
models and entire industries in such a way that
the old model simply dies out, and the new
model becomes the industry norm.
There are many examples. Ten years ago when
we wanted to watch movies at home, we would
get in our cars, and drive to a local Blockbuster
store where we could rent or buy the latest
releases. Along came Netflix, first with its physical
DVD service, and later with its streaming models
for delivering films. Today the site of your local
Blockbuster is probably a dry cleaner or an auto
parts store. Blockbuster itself is gone in the US.
And with Netflix’s arrival in Australia, it likely
won’t last Down Under either. The Blockbuster
‘drive-in’ model was completely disrupted and
destroyed by the Netflix home delivery model.
The biggest disrupter to emerge recently is
the online ride sharing service Uber. You join
with an app, provide your location via mobile
phone GPS, pay with a credit card stored in the
cloud, and your car and driver arrive quickly and
provide courteous service.
No money changes hands and tips are not
involved. Passengers love it, but taxi drivers
are not pleased. They have been striking and
rioting all over the world (and enlisting the help
of politicians) to stop Uber, with mixed results.
Suddenly taxi medallions formerly worth
millions may end up no more valuable than
stock in Blockbuster.
The essence of disruptive business models is
that not only are they new, and more efficient,
but the provider avoids large commitments to
fixed assets and equipment, relying on the web
to deliver services from existing infrastructure.
Uber is one of the largest car service companies
in the world, but it owns no cars. Airbnb is one
of the largest hospitality companies in the world
but it owns no hotels.
Both firms are using pre-existing assets (your car,
your spare bedroom) to deliver transportation
and lodging. (This may be one reason why the
investment component of GDP has been weak
in recent years; that’s a subject for another day).
For disrupters, the secret sauce is the software
platform, and mobile apps needed to connect
buyers and sellers of a service, rather than
capital assets.
Too big too fail?
What if someone disrupted the banks? That
question almost answers itself. It’s happening
faster than the banks realise. Investors
grumbling about how the government props
up banks under its ‘too-big-to-fail’ policy may
discover the banks fail anyway. This will happen
not because of a ‘run on the bank’ but because
the too-big-to-fail banks are too big to innovate.
The banks are getting the Uber treatment
from a host of start-ups, many of which have
already achieved billion dollar plus valuations.
These companies are the so-called ‘Unicorns,’
jargon for start-ups with a $1 billion+ market
cap. So far, the banking elite have not been
in the streets burning tires, and kidnapping
passengers like the Paris taxi drivers, but maybe
they’ll start soon.
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Banks and regulators are aware of the threat
from the disrupters. I spoke to former Fed
Chairman Ben Bernanke about this when we
met in Korea recently. He said, ‘You can pay for
your coffee with your phone. This is amazing!’
He did inject a cautionary note. While banks
are inefficient in certain ways, they do offer
consumer protections that the start-up
disrupters do not. Bernanke asked, ‘Are there
consumer protections for non-card payments by
phone? Does PayPal have them?’ It may be that
the biggest hurdle for the new firms comes not
from the banks, but from aggressive regulators
such as the Consumer Financial Protection
Bureau, (called by insiders, ‘The Bureau,’ in
ominous tones that evoke an image of the
original bureau, the FBI).
Bank disrupters go under the name ‘FinTech,’
short for financial technology.
It’s not a one-size-fits-all category. Some are
peer-to-peer lenders, a more sophisticated form
of crowdsourcing. They offer loans online, and
fund the loans with wholesale lenders like Apollo
or Morgan Stanley. Their computer interfaces are
user-friendly, and it’s easy to apply for a loan.
There is an online loan application, but it’s not
a 1970s legacy style form the banks favour.
These lenders use credit ratings, post codes,
demographic information, and some big data
algorithms to sort out eligible borrowers. Loans
can be disbursed in days or sometimes hours;
no waiting around weeks for banks to decide.
Importantly the cost structure in these peerto-peer lenders is dirt-cheap, even free to the
extent they use the internet. In the same way
that Uber does not own taxis, the FinTech firms
do not have branch offices, tellers, ATMs, and
the other tangible hardware of banks. They
do not have bank examiners walking in the
door and do not have bank regulatory capital
requirements to worry about. Some obtain
lending licenses under local laws.
Creditworthy borrowers
to the front of the line
One of the biggest and most successful of
these firms is SoFi (short for ‘Social Finance’).
They specialise in the private student loan
market. Private student loans are only about
10% of the overall $1.3 billion American student
loans outstanding.
SoFi skims the cream, taking only the most
creditworthy student-borrowers who attend
high-quality, fully accredited four-year schools.
They also get parent co-signers, and limit
borrowers to those with strong credit ratings.
All of the less creditworthy loans are left to the
US Treasury. Government student loans have
sky-high default rates (with losses covered by
the ‘US Taxpayers’).
Meanwhile, SoFi’s loan loss rate is practically zero.
The FinTech category is not limited to peerto-peer lending. It includes online and mobile
payments systems like Mozido (competes
with ApplePay), TransferWise (competes with
Western Union), and iZettle (competes with
Square; a mobile credit card reader that puts a
point of purchase in your pocket).
Another blossoming area in FinTech is cryptocurrencies such as bitcoin. I have never been
a fan of bitcoin as a place to store wealth,
but I have always been impressed with its
blockchain-encrypted technology.
While most people were debating whether to
‘invest’ in bitcoins or not, the real investment
action was in building platforms using
blockchain technology to provide secure private
transfer networks. These transfers are not
limited to crypto-currencies, but can be used for
anything of value including stocks, bonds, real
estate deeds, etc.
Blythe Masters, formerly of JPMorgan, made her
reputation as the co-inventor of sovereign credit
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default swaps. She later went on to manage
gold and silver trading for JPMorgan, and has
now joined a start-up blockchain technology
firm. The former superstar banker is now out
to disrupt her old industry. Here’s an in-depth
profile of Masters’ latest venture.
FinTech also goes beyond financial transactions
to include information about financial
transactions. Michael Bloomberg’s great insight
in the 1980s was that information about bonds
was as valuable as the bonds themselves. He
has a US$7 billion fortune to prove his insight
was correct.
In the 1980s, Bloomberg’s business model was
proprietary end-to-end because there was no
better, safer way to deliver information. (In those
days, a Bloomberg representative would show
up at your offices with a truckload of proprietary
routers, screens, keyboards, etc. and install
everything on your premises.)
Now entrepreneurs are totally open-source
using the web and high quality encryption to
deliver the goods. Entrants in this category
include Markit — a competitor to Bloomberg —
and Waterfund, which is disrupting the sleepy
world of water price discovery. (Editor’s note:
The Founder and CEO of Waterfund is my son,
Scott Rickards.)
To get an idea of the valuations and variety
of the FinTech unicorns, here’s a list of the 25
biggest FinTech start-ups with some good
background information.
As you can see from the list, some of these
companies have already gone public, (Lending
Club, Markit), and some are still in the pre-IPO
stage, (SoFi, Square, etc.). These companies
are all worth a look and we’ll be following them
and writing more in future issues of Strategic
Intelligence. Not every one will be a success,
but there are definitely some future Amazons
in the mix.
It may be that one of the best trades ahead is
a market-neutral, long-short strategy of going
long a basket or ETF of FinTech, and short a
basket or ETF of bank stocks. We’ll be looking at
that also and making recommendations in the
months ahead.
Bottom line: Bet on the disrupters
All the best,
Jim Rickards
Strategist, Strategic Intelligence
As you can see, the FinTech category is
amorphous and defies easy definition. What
the FinTech firms have in common is they are
disrupting established markets with web-based
technology, mobile apps, and scalable models
with relatively low fixed costs.
Sound familiar?
That’s the model Amazon and eBay used to
disrupt the world of retail sales fifteen years
ago. Deserted outlets in your local malls are
testimony to their success. What used to be
Macy’s is probably a food court today. Retail is
moving online. Finance is the next frontier.
9
Understanding the Blockchain
By Shae Russell, Editor
There are two schools of thought when it comes
to cryptocurrencies. There are those that see
it as a saviour to our manipulated monetary
system. Then there’s the government and
invested parties that see it as a threat to the
system they’ve worked so hard to protect.
Take Bitcoins as an example. Each block
contains information about a Bitcoin transaction.
The block has all the Bitcoin details. Such as
price, when, where and who it was transferred
too. And once that data is stored in a block, it
can’t be changed.
Whether cryptocurrencies will ever work
alongside — or even replace — our fiat currency
system remains to be seen.
Think of one block as a complete copy of a
financial transaction. Each new transaction is
linked to the previous one. Forming a digital
chain of information.
However, the very idea that made Bitcoin
a manipulation free monetary system
could possibly be the biggest encryption
breakthrough this decade.
I’ll be honest. After reading Jim’s research this
month, I really wanted to find a suitable stock
recommendation. It didn’t happen, and I’ll
explain more on that in a moment.
First, it’s important to understand why
the ‘blockchain’ behind Bitcoin is truly
disruptive technology.
Bitcoins were developed sometime around
2007 and — for lack of a better word — launched
at the start of 2009.
In other words, each new block is linked to
the one before it. Because you can’t alter the
blockchain you end up with a permanent,
indisputable and verifiable record of the truth
that everyone can see.
The next thing you need to understand is
why blockchain types are important. And
that there are two blockchain types:
unpermissioned and permissioned.
Permissioned is also known as the distributed
ledgers or a replicated shared ledger. In other
words, most of the data is centralised. Basically
the information is stored in one location.
Less than two years into Bitcoin trading, the
mainstream caught on. Since then, there’s been
hot debate on whether Bitcoin — or any other
cryptocurrency for that matter — could replace
our current fiat currency system.
The unpermissioned is the model Bitcoin uses.
Now, unpermissioned blockchain is an open,
decentralised ledger. That is, this is a distributed
system. The blockchain information isn’t stored
in one location. It takes advantage of a vast and
established digital network.
Until now, most people have overlooked the
remarkable blockchain technology behind Bitcoin.
Think about it like this.
This is where the real investment opportunity is.
Basically, the blockchain is a series of data, or
‘blocks’ — roughly 40 bits in size — that records
and stores information.
Every single Bitcoin — including the entire
transaction history — is distributed across
millions of computers around the world. Every
single transaction is spread across the globe, at
little or no cost.
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There are a couple of reason this technology
appeals to the finance sector.
What you must remember is that all finance
transactions are simply moving something
from one ledger to the other. In other words,
transferring data from one set of books to another.
But, the finance sector must build and provide
their own infrastructure for all of these
transactions. Whereas blockchain technology
takes advantage of the existing digital setup.
Equally important is how the blockchain
encryption secures the transaction. As I said
earlier, because blockchain can’t be undone, it’s
a permanent, undisputable record of events.
The blockchain programming involves a
lot of ‘if X occurs’ type of orders. So if one
programmable event occurs, the code
automatically authorises the event to proceed.
And it happens every time the blockchain
encounters another ‘if’ request.
This ability means there’s the potential to code
legal clauses inside each block. Essentially, the
blockchain has the potential to authenticate
digital transactions. Offering people irrevocable
proof of ownership, with a traceable history.
Given this sort of security, it’s possible in the not
so distant future that the blockchain could be
the digital equivalent of a notary’s stamp.
You can see why the blockchain is attractive to
the finance sector.
Not only is every transaction secure, but
there’s also the ability to take advantage of
existing digital assets that would significantly
reduce a company’s costs. It’s extremely exciting
nascent technology.
Which has made finding an investable angle
difficult this month.
As I said before, I really wanted to find you
an exciting — perhaps even speculative —
blockchain related recommendation this month.
Trust me, I tried.
The first problem I encountered was the lack of
publicly traded blockchain companies available.
At the time of writing, the only publicly
available blockchain company is in America.
And it trades on the over the counter (OTC)
market. The OTC market adds another layer
of complexity for investors.
There is another company listing in Australia in
November. And another one that has delayed
its debut on London’s AIM twice now. Now, we’ll
follow both these stories and keep you updated.
But the thing is, neither Jim nor I are really sold
on any of these companies. And there’s one
reason why.
A large part of their business is derived from
mining Bitcoins. And as Jim explained earlier,
he’s doesn’t like Bitcoins as an investment.
It’s the technology behind Bitcoins we want
to invest in. There are plenty of privately
held companies working on just blockchain
technology for the FinTech sector.
These are the companies we’re on the lookout for.
The point is, the blockchain technology could
be the most exciting tech since the internet
came along and disrupted our lives.
Blockchain technology is in its infancy. At this
point, we still don’t know how big the disruption
will be. But it certainly looks like it could be huge.
Regards,
Shae Russell
Editor, Strategic Intelligence
11
Jim Rickards’ Strategic Intelligence Buy List
Ticker
Symbol
Stock
Entry Date
Entry Price
Current
Price
Buy Up To
Price
Current
Gain
Inflation Portfolio
Franco-Nevada Corporation [Jun '15]
NYSE:FNV
8/06/15
$49.61
$42.23
$55.00
-13.9%
Bank of Nova Scotia [Jun '15]
NYSE:BNS
8/06/15
$52.61
$43.08
$60.00
-17.1%
ASX:IHD
9/06/15
$15.60
$14.02
$18.00
-11.8%
iShares Dividend Opportunities ETF [Jun '15]
Deflation Portfolio
Government Properties Income Trust [Jun '15]
NYSE:GOV
8/06/15
$19.32
$16.18
HOLD
-14.0%
Wasatch-Hoisington US Treasury Fund [Jun '15]
NASDAQ:WHOSX
8/06/15
$17.68
$18.15
$20.00
3.2%
NYSE:WTR
8/06/15
$25.61
$26.00
$30.00
2.2%
ASX:ILB
30/06/15
$112.27
$114.31
$117.00
1.8%
NYSE:DSUM
22/07/15
$24.65
$23.20
$25.50
-5.6%
Aqua America Inc [Jun '15]
iShares Government Inflation ETF [Jun '15]
PowerShares Chinese Yuan Dim Sum Bond
ETF [Jul '15]
Prices in currency of local exchange | 9.42AM Thursday 24 September 2015
^ Moved to Hold on 18 August 2015 at US$16.84
The market will crash by 90%
Few wanted to listen when Vern Gowdie published this idea last September.
But is this the beginning of the historic crash he predicted?
Here’s how to protect your family from what’s coming.
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