Following the first excerpt from the latest weekend note by One River's prolific CIO, Eric Peters, in which the hedge fund manager discusses the outer limits of speculation, and why there is no such thing as "this time will be different" in markets, he also had some notable observations on why of all the asset bubbles currently abounding, that of bitcoin may be the most informative about human nature...

Anecdote

 

Bitcoin is important,” said Lithium, handsfree on Highway One. “It reminds people that supply scarcity, capital flows, and imagination, matter more than anything.”

 

Bitcoin printed another 20% weekly range. “Risk tolerance is the market’s most important fundamental,” said Lithium, racing through Malibu, SoCal’s sun streaming, steaming, “It’s also the most mysterious of all market drivers.”

 

Like every form of intangible money, Bitcoin is an illusion, that derives value through our collective acceptance of its worth. And if that sounds circular, it is. Anyhow, Bitcoin’s value fluctuates like any other currency,  just more wildly. That’s because people hold vastly different opinions as to its worth; ranging from zero to near infinity.

 

What these opinions have in common is that they’re each the product of an active imagination.   “Bitcoin’s ascent reminds people of all the money they’re not making.”

 

Not since the housing bubble has society succumbed to mass financial hysteria. Before that had been dotcom fever, which followed the Asian Tigers, and so on, infinitum. But in recent years, we’ve succumbed to incrementalism.

 

As interest rates collapsed to zero, each basis point took on greater significance. Central banks moved in ever decreasing increments. They printed money on pre-defined schedules. Balance sheet reduction is now formulaic. Drip, drip, drip. As interest rate expectations rise or fall 10bps, global asset prices ebb and flow, slavishly, one tethered to the other.

 

Imagination remains absent, unlike 1999, when people used credit card cash advances to buy fairy tales. In 2007 they bought castles on credit, scoffing at each 25bp rate hike - until they didn’t. That’s how these things end.

 

“Bitcoin is igniting imaginations. Unleashing speculative spirits. And for money managers, the only defense against a bubble is to buy it. Which is exceedingly difficult, because this kind of story ends like 1987.”