One early bitcoin investor with a traditional background is less concerned about any upcoming bubble.
On this episode of “The Breakdown,” NLW analyzes value investor turned bitcoin bull Bill Miller’s contrarian take on a possible upcoming market bubble. Miller’s background lies in traditional markets, with a massive portion of his portfolio grounded in strategically held Amazon shares. That, in addition to his relatively early bitcoin investments, provides him with an insider perspective from an external base understanding of markets. While other top investors predict an “epic” market crash, Miller remains unconcerned.
Today on the brief, NLW covers the most recent crypto market news, including:
- New CPI releases fanning the inflation debate fire
- Crypto volatility spillover risks to traditional markets
- Square’s forthcoming hardware wallet
Newly released Consumer Price Index (CPI) numbers fuel an ongoing, contentious debate around inflation. While the Federal Reserve sticks to its “transitory” assessment, others are not so sure. How will the numbers change as base effects no longer become a valid explanation?
As institutional investors fill the crypto space, a “spillover” system risk concern becomes increasingly relevant. Is spillover just another piece of FUD, or is it an inevitable reality as traditional and crypto markets become more entwined?
Square’s teasing of a hardware wallet project is materializing. CEO Jack Dorsey tweeted no less than 12 guiding principles for the project, and the project lead more recently announced the company’s dedication to make “bitcoin custody more mainstream.” Although no exact timeline for release exists, Square’s project is an exciting step towards easier entry to bitcoin mobile and self-custody use.
The Breakdown is written, produced by and features NLW, with editing by Rob Mitchell and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Only in Time” by Abloom. Image credit: Abscent84/iStock/Getty Images, modified by CoinDesk.
What's going on guys? It is Tuesday, July 13, and we're talking about why bitcoin bull Bill Miller doesn't think it's a market bubble even though others seem to think so. First up, however, let's do the brief.
First of the brief today, it is CPI day and I don't need to tell you guys as regular listeners of this show how contentious the debate around inflation is right now. The Fed is invested in trying to convince everyone that the numbers are high but transitory based on specific dislocations related to the world coming out of Corona, Wall Street is invested because they're worried that the cheap money party will come to a, in their minds, premature end if the Fed is forced to take action and raised rates. Bitcoiners are invested because inflation eating away people's savings and generally making their lives harder is a key part of their philosophical thesis for bitcoin in the first place. All of this added up gives the release of new numbers a pretty serious significance. Well, the latest numbers are out and they're pretty sure to make this debate rage even hotter. The Consumer Price Index jumped about 0.9% in June month-over-month, 5.4% year-over-year. The monthly changes are the largest one-month change since June 2008. When you exclude food and energy, the so-called core CPI, month-over-month was also 0.9% and year-over-year was 4.5%. This was more than expected, Bloomberg economists had predicted 0.5% monthly and 4.9% year-over-year, the big drivers of inflation are sort of what you'd expect: increased demand, particularly around things like travel. And there also continues to be supply shortages, although many commodity prices like lumber are starting to come back to Earth.
There also shifts in employee expectations, a lot of people are making different decisions that are looking to be paid more. For the first time in a long time, some of these costs are being passed on, 47% of small businesses rose average selling prices in May, and that was the highest share since 1981.
Now, as always, there's a ton of hemming and hawing about the implications of all this. And I'll just point to one tweet that I think nails it from Meltem Demirors, she writes: "Cost of living CPI is up 5.4% year-over-year, with June alone seeing 0.9% increase, median price to buy a home is up 23% year-over-year, wage growth is up 3.7%. Returns to labor are less than the returns to capital. And you ask why everyone is becoming an investor." What I like about this take is that it's just observational. In a world where increases in wealth happen almost entirely by deploying capital and markets versus deploying labor to work, no wonder more people are trying to get in on that game.
So, what should we be watching for around inflation from here? So far, it's easy to dismiss a lot of this as an issue of base effects. Base effects refers to the fact that when you have a year-over-year measure, if there was a major dislocation a year ago that would explain some of these seemingly high numbers. May 2020 was sort of peak base effects, it was a peak contraction and economic activity. And so from here on out every month farther away from May 2020 that we get, there's going to be less power for base effects to explain high inflation. So, that will be something to keep an eye on if and how it changes the larger public discussion.
For now, in this brief let's move over to crypto markets. Here's a new FUD narrative that I see emerging, let's call it "spillover" Fudd. The argument in a nutshell is that crypto is super volatile. It involves people trading with high leverage that exacerbates huge swings in the market. And I'm increasingly seeing folks in the traditional finance and regulatory side calling out how that volatility and those major swings could increasingly represent a systemic risk to other asset classes as well. In other words, crypto risk might spill over to traditional markets. I noticed a bit of this in the recent House Financial Services hearing on crypto. In particular, one of the expert witnesses described how as hedge funds get more exposure to crypto, they could effectively translate risk from that asset class into other asset classes. The concern is that if hedge funds get some huge margin call based on a massive down move, it could cause other assets in their portfolio that aren't crypto to get liquidated. The example of Archegos is high in everyone's mind where when in March, it couldn't meet a margin call a bunch of banks offering prime brokerage services started to liquidate billions and stock. Ultimately, Credit Suisse lost about $5.5 billion, Nomura lost about $2.9 billion, Morgan Stanley lost $900 million and UBS lost $775 million. The concern that something like this could start in crypto and then move to other areas is exacerbated by the opacity with which hedge funds operate. Up until now crypto has been so retail focused that its risk has been largely self contained. Sure, individual consumers who bet with too much leverage might be hurt, but it wasn't going to spill over. Now that institutions are moving into the crypto space on mass, the concern of systemic risk is growing. And since we have no ability usually to see what type of hedge funds are making. It makes it very difficult to see how a particular market action could cause a problem.
Now, one testimony does not a narrative make, however, check out this headline on CoinDesk today, "Bank of England Warns of Crypto Spillover to Mainstream Markets." The BOE just released about a 50 page report on financial stability that has a short section on cryptos. Quote, "The increase in risk taking is also manifested in the price volatility of certain crypto assets. Alongside these indicators, rapid appreciation of crypto asset valuations and recent high levels of price volatility and these instruments could highlight potential pockets of exuberance. Prices of major crypto assets such as bitcoin and etherium experienced sharp appreciation over the 12 months prior to April 2021. In particular, the price of bitcoin rose six fold over that period, but it then sold off sharply in May such that its price fell by around 50% and has remained at this lower level and remains particularly volatile, with price changes skewed to the downside in June 21. Spillover to broader financial markets from this episode were limited. Market intelligence suggests crypto assets are largely held by retail investors with institutional investors having limited exposure at present. However, there are some signs of growing interest in crypto assets and related services from institutional investors, banks and key payment systems operators. These developments could increase the inter linkages between crypto assets and other systemic financial markets and institutions."
So, as you can see, it's nascent, but they're making this connection. Last month as well, The Basel Committee of the Bank for International Settlements started to discuss a similar issue suggesting that banks should set aside enough capital to cover losses in full. So, to me, the blending of crypto and traditional finance is inevitable. And there is a version of these discussions that isn't FUD, it's just preparation for an inevitable reality. What I'm watching for is if and where this volatility spillover narrative is used as a way not to institute best practices for handling that volatility, but instead as a justification to try to prohibit or restrict crypto.
Last on the brief today, a story from last week that I didn't have a chance to really cover. You remember at the beginning of June that Jack Dorsey tweeted that Square was considering making a hardware wallet, he started off the possible effort with a thread that explained their guiding principles, which included 1), that Bitcoin was forever and that a noncustodial solution had to be for everyone as well; 2), that holding crypto on exchanges wasn't sufficient, aka no keys no cheese; 3), that there was room for assisted self custody, that was a term they introduced; 4), that any solution had to be mobile first; but 5), that they had to recognize the challenge of mobile; 6), that any solution had to blend availability and security; 7), that safety is complicated; 8), that we needed to find recovery mechanisms that didn't burn money; 9), that there are real questions around the necessity of displays; 10), that trust can't be required; 11), that any mainstream hardware wallet had to have native Layer 2 support; and 12), that it needed to be integrated with native apps.
Anyway, a month or so later, Dorsey and Square have confirmed that the project is on Project Lead Jesse Dorogusker tweeted: "We've decided to build a hardware wallet and service to make Bitcoin custody more mainstream. We'll continue to ask and answer questions in the open. This community's response to our thread about this project has been awesome, encouraging, generous, collaborative and inspiring. The questions and principles we surfaced in our original thread resonated with a lot of questions and issues to reconcile and we'll start with this product direction. Bitcoin first, global distribution, multi-SIG to achieve assisted self custody and prioritizing mobile use." So, if this is something that excites you and you're interested in joining their team, they have put out the call email: email@example.com. I would love for "Breakdown" listeners to be involved in this effort.
Finally, let's move to our main topic. There is a ton of discussion around bubbles these days, yet one investor, a legendary value investor turned Bitcoin bull, Bill Miller, isn't quite sure. His new quarterly letter is an interesting contrarian take on the market. Before we look at that letter, however, let's discuss who Bill Miller is. Miller had an absolutely epic run. His flagship fund, the Legg Mason Value Trust, beat the market 15 years in a row. In 2008, however, it absolutely dumped, crashing 55%. He had made leveraged bets on Bear Stearns, Freddie Mac and others, but the Fed's action underwhelmed what he thought they were going to do. After that 55% crash, withdrawals from the fund were insane. He went from $77 billion under management to about $800 million under management. That, plus a divorce settlement, led to Miller having a 90% cut in personal wealth in just a few months.
Even surrounding all this, though, he did a couple of things right. First, he was a long term buyer and holder of Amazon, starting from just after IPO in 1997 and even increasing his stake after the dot com bubble burst. He had to sell a bit after those fund withdrawals in 2008 but he bought a ton of call options when Amazon tanked that same year. Those shares have gone from worth under $40 per share in November 2008 to over $3,000 now. In 2020, Amazon made up 83% of Miller's personal portfolio and he guesstimated that he was the largest individual shareholder in the company whose "last name isn't Bezos." Still, according to a Barron's interview earlier this year, another bed of Miller's has exceeded his Amazon stake in value.
That is, you guessed it: bitcoin. Miller started buying bitcoin between $200-$300 a coin and said his average cost basis is around $500. Despite that insane 2008 fund cratering, Miller is a billionaire again, thanks to his Amazon and Bitcoin stakes, or at least he was in April when he was doing the interview where he discussed all of this. So, you've got something really interesting here: a classic old school value investor who also got in on bitcoin really early.
Let's get back to his letter. The main subject is whether we're in a bubble. Here's how we set it up. "As I was gathering some material for this market letter, I came across this headline in a well known business publication, 'Michael Burry, Jeremy Grantham, and other top investors are predicting an epic market crash. Here are their gravest warnings so far. Jeffrey Gundlach, Leon Cooperman, and Stanley Druckenmiller expect a downturn too.' Without quoting every one of the eight investors' views, here's a typical cross section: 'Greatest speculative bubble of all time,' Burry. 'Full fledged epic bubble,' Grantham. 'Saying the market was anything other than overvalued versus history is just to be ignorant of all the metrics valuation,' Gundlach. 'I have no doubt that we are in a raging mania in all assets,' Druckenmiller. Then, Stan added, 'I also have no doubt that I don't have a clue when that's going to end.' He pointed out that quote, 'I knew we were in a raging mania in mid-99, but it kept going on and if you shorted the tech stocks in mid-99, you were out of business by the end of the year.' The others quoted in the story mostly did not appear to share Stan’s cautiousness about the risks of actually acting on predictions of a dramatic decline in stocks. I recall George Soros saying in 2008 that he had predicted that financial crisis. He then rightly noted that he had predicted many financial crises over his career that never materialized."
So, as you can see, Miller is getting into this confusing dynamic of it being possible for there to be a bubble, but for the bubble to have more room to inflate, and that being where investors make their money or not. He quoted another article called "A Killer Wave in the NASDAQ Bubble." Quote, "Many technology stocks were fundamentally overvalued while many of the meme stocks, cryptocurrencies and other COVID winners will prove fundamentally worthless. There is nothing inconsistent about expecting further big gains and asset prices that are already fundamentally overvalued. This should be obvious to anyone who experienced the 1989 Japanese bubble, the 1999 dot com bubble and the credit bubble of 2008."
But here's where Miller's contrarian take comes in. Quote, "What is a bit curious about the bears predicting an epic market crash is that we had one only 15 months ago, the market went down the most in history and a four week period ending on March 23 due to the panic over COVID-19 before beginning the remarkable recovery that we are currently experiencing." I think the thing that Miller is noticing is that there is an entire cottage industry in the sky is falling. In a world of exuberance, it can seem extremely clever to be the naysayer. The problem, of course, is that when the perma-bears predict their umpteenth market crash, it weakens their ability to actually move people to action. They become Kassandras, profits doomed to tell the future with no one to heed their warning. Of course, many of them also have paid newsletters or other financial interests specifically designed around their doomer prophesizing.
On the topic of inflation, Miller says that he has no idea but he does think that we've collectively forgotten the real problems of inflation. Quote, "Inflation has been too low, as the Fed sees it, for long enough that most investors have forgotten the 1970s and early 1980s when it was a major problem. It is perhaps ironic that 50 years ago, President Nixon took the U.S. off the gold standard. During the post-war period through 1971, global banking crises were few. Since going to a system of floating exchange rates, there have been many. Bitcoin was born out of the 2008 crisis and was designed to be free of government control and manipulation to be the ultimate in an inflation proof asset." It is an open question if it will be an enduring store of value with many strong opinions on both sides. Ultimately, Miller's main point is that we simply don't know and that at least to him, things seem kind of fine. Quote, "A recent study of inflation forecast by economists, consumers in the bond market found no significant ability to make value added predictions, quote, as the New York Times puts it, as far as major shifts in inflation go, we are all in the dark, just as we are all essentially clueless about where the stock market is heading or the price of oil in 2022, or the date of the next recession. The words that one reads about regularly in the press, and in research reports are already priced into the market commensurate with the market's assessment of their probability. The market looks broadly fairly valued to me, with most stocks priced to provide a market rate of return plus or minus a few percent. There are pockets of what looks like appreciable overvaluation and pockets of significant undervaluation in the U.S. market. In my opinion, we can find plenty of names to fill our portfolios, and so remain fully invested."
So to wrap up, I find this analysis fascinating for a couple of reasons. First, it is just so comparatively calm and non ideological, which is a real change of pace for those of us who hang out on crypto Twitter. Second, it is almost willfully non-committal. Other people disclaimer their financial op-eds with "not financial advice," but this guy is really not really giving a lick of financial advice. Third, it's super interesting to see such a large bitcoin holder and advocate and go all in on the inflation story and the bitcoin as inflation hedge narrative. I think it gets back to a story of bitcoin that never really leaves although it often takes a backseat to whatever the narrative does your is that is bitcoin as non-correlated, bitcoin as a new type of force, bitcoin as a thing that just keeps plugging along no matter what we try to say about it, bitcoin as, to quote David S. Pumpkins, "its own thing." It's easy to forget that the broad base of holders is far less ideologically homogeneous than Bitcoin Twitter would make one think and that ultimately what they are interested in, is an asset with no precedent in human history.
Anyways, guys, let me know what you think about Miller's assessment, hit me up on Twitter @NLW, and if you're enjoying the show, please go take a minute to rate and review it. I really appreciate everyone who does that. Until tomorrow guys, be safe and take care of each other. Peace!