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August 14, 2020

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Here’s my routine. Each morning I begin my day with meditation and exercise, then fix up a bowl of Bob’s Red Mill while I scan The New York Times (to take the pulse of the world) and Reddit (to take the pulse of the Internet).

The Reddit community usually upvotes cute cat photos and funny GIFs (here’s one that will make you laugh). This week, however, the following post made it to the homepage of Reddit, where it quickly went viral (warning: language).
It’s a fair question.
This question ignited over 1,200 responses, including a surprisingly nuanced conversation about the value of gold. This is not the kind of crowd pleaser that usually wins Reddit gold, but it is an important data point. Why?

Suddenly, the crowds are wondering about the value of money.

Until coronavirus, we’ve lived with the idea that we have to work hard for our money. Money was scarce and difficult to earn. In response to the coronavirus, governments are printing money, and giving it away for free.

We all have one question: "wait, what?"

“You’re telling me we could have been printing money all along?” we all ask ourselves. “So why am I working so hard?” There’s a cognitive dissonance: while we all appreciate the money, something about it doesn’t feel right.

Free money seems too good to be true. What's the catch?

So we end up with the people questioning the value of the dollar, and (half-jokingly) proposing that McMoney might be more valuable, since at least it can be redeemed for food.

This is simple human psychology: we all know there’s no such thing as a free lunch. Suddenly, we’ve all received a free lunch. Who will pay for that lunch?

Which brings us to data point #2: The Coin Shortage.

The Psychology Behind Coin Shortages

I recently snapped this photo at a pharmacy cash register, where I was buying allergy medicine (a valuable item) with my free money (printed out of thin air). I have researched why there is a coin shortage, and the experts blame the coronavirus lockdown:

  • People aren’t spending coins in vending machines and laundromats.
  • People aren’t using as much cash to pay for small retail purchases.
  • People aren’t dumping their piggy banks into supermarket kiosks (like Coinstar).

I'll add another explanation: perhaps people are hoarding coins.

Human psychology says that we all have a lot of FUD (Fear, Uncertainty, and Doubt) about the future. If you’re the type of consumer who still pays for things in cash, you may well be hoarding that loose change, in the same way you may be hoarding toilet paper and SPAM … just in case.

Logically, if we really think money is losing its value, we’d spend it as quickly as possible, converting it into assets with “real” value (like gold). This is, of course, already happening:
Hoarding gold and hoarding coins, for most people, are two sides of the same coin (so to speak). Economically, they’re completely different (see the Reddit discussion), but they feel kind of the same.

Human psychology is often illogical. But it matters a lot, because moods drive markets. If we all believe something has value, it has value. If we lose our faith in it (say, we suddenly get a lot of it for free, with no strings attached), then the value plummets.

This can become a vicious spiral, leading -- in the most extreme cases -- to hyperinflation.

The Psychology of Hyperinflation

Hyperinflation, as we’ve covered in previous columns, is where an economy experiences rapidly escalating prices, along with rapidly depreciating currency. (Here’s a list of notable examples.)

During hyperinflation, mob mentality takes over: as soon as people get their paycheck, they rush to go buy things of real value (like Big Macs and allergy medicine) because next week these things could cost twice as much. This negative spiral is both economic and psychological: it is a self-fulfilling prophecy. (Counterintuitively, coins can become scarce.)

Two things are necessary for hyperinflation:
1)     A huge increase in the money supply (check)
2)    With a decrease in the production of goods and services (check).

Common sense tells us that people have not been as productive during the coronavirus. Most professionals are working from home, while trying to manage kids and their own anxieties.

People aren’t traveling or networking, so deals aren’t getting done. Meanwhile, time wasters like Netflix and video games are on the rise. Also, there’s free money, so why work?

Here are the numbers to back up that common sense, brought to us just moments ago by the U.S. Bureau of Labor Statistics:
If charts could talk, this one would be saying, "Ay-yi-yi!"

It takes the bureau a while to compile the data, so we’re actually looking at numbers from April-June 2020, during the peak of the coronavirus craze.

You have to dig through the press release to find the numbers that matter, which is that business output is down 11% from a year ago, and down 38.7% from the first quarter of 2020. (For manufacturing, which is broken out separately, the numbers are even worse.)

In plain English, this means that people are not as productive. The bureau buried it in Table A-1 at the back of the report, so I’ve taken the liberty of highlighting the most important numbers:
And here it is helpfully displayed as a graph, as it should have been by the government organization that prepared it:

Meanwhile, hourly compensation is on the rise:
To summarize: the government is printing money, people aren’t productive, and they’re being paid more to do less. Meanwhile, people are questioning the value of money, even while they hold on to it.

Whenever we highlight a problem, we should try to offer a solution. Here’s mine.

The Solution: Reverse Psychology

I will tackle this from the human psychology perspective, because I believe that doesn’t get enough credit in most discussions about the economy.

The economy is, of course, a human invention: it is not a great law of the universe, like mathematics. Although economics uses math, it’s not math. Although we treat economics like a science, it’s not a science (at best, it’s a pseudoscience).

Because humans invented the economy -- not nature -- the economy is subject to human feelings. Because humans are emotional creatures, our anxieties and fears have real economic effects. When we all believe in something, the price rises, and when we no longer believe in it, the price falls.

When we all start hoarding coins because we’re afraid there’s going to be a coin shortage, guess what? There is a coin shortage.

As I say in my book: To make money, you’ve got to zig when everyone is zagging, and zag when everyone is zigging. You’ve got to use reverse psychology. Here are the strategies I'm following:

1)     Diversify, diversify, diversify. The only thing we know for sure is that we don’t know anything for sure. So look for ways to diversify your savings, your 401(k), your business activities. Think of a wide array of assets, in a wide array of countries: anything people will expect to “hold its value.”

2)     Invest in yourself. As we continually preach here at Bitcoin Market Journal, the best investment is in yourself. If you’re out of work, use this time to learn new skills. If you’re less productive than usual, work twice as hard on something that’s grabbing your interest.

3)     Consider buying digital assets. If you’re not already into bitcoin and altcoins, this is a great time to get started. We’re already seeing a great boom in bitcoin (from $7,300 before the coronavirus to $11,500 today), and that may continue as people leave traditional money behind.

These are reverse psychology strategies. While people are holding onto coins, you’re using them to buy a diversified set of assets. When people are playing video games and watching Netflix, you’re working hard, building your brain. While people are spending their free money, you’re investing it into bitcoin.

Most importantly, these strategies put you in control. Rather than sitting on your couch, nervously waiting for the other shoe to drop, you can be doing something that prepares you for what’s next – whatever that is.

The answer to the Reddit question, of course, is that even McMoney won’t hold its value if the underlying currency can’t be used to buy burger meat. (Burger meat, by the way, is 15% more expensive than last year.)

So what will hold its value? Your brain, for one. (Learn stuff.) Maybe real estate, maybe gold. (Diversify.) Maybe bitcoin. (Consider crypto.) Figure out where the crowds will start putting their money -- but don’t follow the crowds. Lead them.
Health, wealth, and happiness,
John Hargrave
Bitcoin Market Journal
Hi Everyone,

For all the antagonism I've been harping on the new-wave investment mentality lately, there are several star qualities of the contemporary retail trader that bear highlighting.

This story is an emblematic example one of those star qualities. ...
Here is a bit of background. ...

For months we've been seeing popular protests on the streets of Hong Kong, as the government there slowly progresses from democracy to where it is now, a puppet of China.

While the United States was wrestling with COVID-19 two weeks ago, Hong Kong's parliament managed to pass a law that basically allowed China to arrest any person for any reason, on the auspices of anti-terrorism and national security. Fancy words for stripping the people's right to free and peaceful protest. 

Though they vowed the law would not be abused, most recently they've arrested a man named Jimmy Lai, the CEO of a local left-wing newspaper, the Apple Daily, ostensibly for content that they published that was anti-China.

An emotional Lai was on Bloomberg TV this morning, explaining how if he was arrested for simply exercising his free speech, then the company simply cannot operate going forward.

This story puts a new light on on the latest phenomena, in which we've seen a string the bankruptcy pumps, where stocks manage to completely detach themselves from traditional valuation models and soar purely from on the basis of behavioral economics and ideology investing.

It's just our generation, the millennials, doing what millennials do and voting with our money. Allocating our capital to influence the future in a way we imagine it, and putting our investments where our hearts are.
Dysfunction on Blockchain

For all the political wrangling and bipartisan bickering and feet dragging we've seen from the U.S. government in the last few decades, this one really takes the cake.
Are you freaking kidding me?!?!

The last provisions from the CARES Act expired more than a week ago, and with millions of Americans are still on varying levels of mandatory furlough, the U.S. government failed to write a check that will sustain people, allow them to pay the rent and put food on the table. Instead, they're going on vacation for AN ENTIRE MONTH!!!

Honestly, I'm not pointing blame at the left or the right. It's their lack of ability to work together that brought us here. If your response to reading that previous sentence is "but the left/right..." then it's time to admit that you are part of the problem.

In any case, analysts on Wall Street are already doing their best to completely detach themselves from what's happening in government and even from the upcoming elections, which are now less than three months away.

No doubt the markets have done very well under President Donald Trump. This graph of the S&P 500 has highlighted Trump's 2016 election in a purple circle.
The new narrative that has emerged over the last week is that presidential candidate Joe Biden is good for stocks.

Yes, he'll raise corporate taxes, but he'll also pour free money into the economy at an unprecedented rate and possibly even smooth out the response and recovery from the pandemic, positive qualities that should outweigh any setbacks of higher taxes.

Now the question becomes, can he win? Or will the market need to readjust the narrative again if Trump takes it?
The Portnoy Pump

Yesterday, the entirety of the crypto community got together to watch Dave Portnoy take his first step into crypto since he became the self-proclaimed leader of the current Wall Street pump. If you haven't seen it yet, here's the prerecorded footage of Davy Dave and the Winkelvii.

What really got me about this was what really got Portnoy. His mind was completely blown by the fact that Elon Musk plans on mining gold in outer space. I mean, really? You're having a meeting about financial freedom for you and all your followers, and that's your big takeaway?

We can also almost physically see the gears turning in his head on everything that comes to token creation, especially when it comes to pump and dump schemes. You mean we can have a Dave Portnoy coin? Well, good luck getting through the Securities and Exchange Commission with that one.

There's no doubt in my mind that now that he's got his finger on the trigger and a fresh account to buy crypto, he will figure out just how the low liquidity and current momentum of link can send the poor coin for a ride through the stratosphere. I fear the winter that will come after though.

In any case, whether caused by him or not, we can see that there was a noticeable and much-needed leg up in bitcoin following Portnoy's dramatic entry.
Now, if he really wants to prove his influence, he'll adopt Anthony Pompliano's full tag line, or at least a revised version of it.

Long link, short the stinks.

Leaving the glam and politics of the matter, as many bitcoin whales will no doubt tell you, causing a short-term move is easy, but doing it consistently is impossible. There's only so much monkey business this market will accept before chewing you up and spitting you out.

Bitcoin doesn't need Dave Portnoy, but it's certainly fun having him around. Have a beautiful weekend!

Mati Greenspan
Analysis, Advisory, Money Management