I’ve read some Lyn Alden articles before and find them interesting and plausible, but I’m not sure what to think about them. She seems to have fans among cryptocurrency advocates, but few critics...
I’ve read some Lyn Alden articles before and find them interesting and plausible, but I’m not sure what to think about them. She seems to have fans among cryptocurrency advocates, but few critics that I can find, because she’s otherwise not well-known? I’d be interested in reading what expert critics have to say. I can try poking a few holes:
One thing to point out is that long-term gains aren’t everything and stability over the short and medium term are also important. Here’s a hundred year price chart for gold and note that it’s a log scale. It took 30 years after the 1980’s to reach the same peak again - not great if you don’t have the patience to wait 30 years.
Also, any volatile, rising asset will look better if the time period you’re looking at ends near a peak. This implicitly makes an assumption that you sell at a peak. Market timing isn’t easy. (We make the same assumption when we look at the current prices of our investments. Maybe it looks good, but are you going to sell now?)
With volatile assets, it seems especially important to buy low, and they tend to get a lot of hype when they’ve reached a new high, which encourages the opposite.
For these reasons, using gold as a benchmark seems unreasonable? Sure, other investments look bad if you compare to a very risky (but rising) investment. Though, I suppose the same could be said about using the S&P 500 as a benchmark, for people who consider stocks too risky.
The point about only a tiny percentage of stocks being good investments seems important and a good reason to invest in index funds.
“Fiat currency short” is an interesting way to describe borrowing money, but for a stable currency, the bet on inflation (more typically described as protecting your savings against inflation) seems like a long-run concern and interest rates more important in the short run. Interest rates are society’s consensus on how much to discount future gains, relative to a currency. The value of any long-term investment (resulting in future cash flow) goes down when interest rates rise.
Her description of how debt is used by large businesses agrees with how I understand it from other sources, though it’s not described as shorting a currency.
She seems to have come up with a conceptual hack - all ways of borrowing money (which includes many, perhaps most businesses) are described as shorting a currency. This is more conventionally described as investing your money, and borrowing for leverage. A more conventional explanation for why this works is that businesses produce goods and services that people value (they have cash flows), which is better then letting your money sit and do nothing. (And I’ll point out that Buffet has no patience for gold bugs.)
(continued)
The article does talk a bit about cash flow. It points out that leverage results in higher valuations for things like real estate that have cash flows. A fair point, but it’s also true that gold and “hard currencies” (probably meaning Bitcoin) have no cash flow.
It’s possible to borrow and buy these things too, which some speculators do if they think they will go up. Why wouldn’t that result in excessive valuations? With no cash flow, it’s difficult to say what counts as excessive. There isn’t a calculation to do, it’s just vibes.
Also, using gold as a benchmark is a way of defining its value as constant, which is another way of discouraging such questions.
I’ve read some Lyn Alden articles before and find them interesting and plausible, but I’m not sure what to think about them. She seems to have fans among cryptocurrency advocates, but few critics that I can find, because she’s otherwise not well-known? I’d be interested in reading what expert critics have to say. I can try poking a few holes:
One thing to point out is that long-term gains aren’t everything and stability over the short and medium term are also important. Here’s a hundred year price chart for gold and note that it’s a log scale. It took 30 years after the 1980’s to reach the same peak again - not great if you don’t have the patience to wait 30 years.
Also, any volatile, rising asset will look better if the time period you’re looking at ends near a peak. This implicitly makes an assumption that you sell at a peak. Market timing isn’t easy. (We make the same assumption when we look at the current prices of our investments. Maybe it looks good, but are you going to sell now?)
With volatile assets, it seems especially important to buy low, and they tend to get a lot of hype when they’ve reached a new high, which encourages the opposite.
For these reasons, using gold as a benchmark seems unreasonable? Sure, other investments look bad if you compare to a very risky (but rising) investment. Though, I suppose the same could be said about using the S&P 500 as a benchmark, for people who consider stocks too risky.
The point about only a tiny percentage of stocks being good investments seems important and a good reason to invest in index funds.
“Fiat currency short” is an interesting way to describe borrowing money, but for a stable currency, the bet on inflation (more typically described as protecting your savings against inflation) seems like a long-run concern and interest rates more important in the short run. Interest rates are society’s consensus on how much to discount future gains, relative to a currency. The value of any long-term investment (resulting in future cash flow) goes down when interest rates rise.
Her description of how debt is used by large businesses agrees with how I understand it from other sources, though it’s not described as shorting a currency.
She seems to have come up with a conceptual hack - all ways of borrowing money (which includes many, perhaps most businesses) are described as shorting a currency. This is more conventionally described as investing your money, and borrowing for leverage. A more conventional explanation for why this works is that businesses produce goods and services that people value (they have cash flows), which is better then letting your money sit and do nothing. (And I’ll point out that Buffet has no patience for gold bugs.)
(continued)
The article does talk a bit about cash flow. It points out that leverage results in higher valuations for things like real estate that have cash flows. A fair point, but it’s also true that gold and “hard currencies” (probably meaning Bitcoin) have no cash flow.
It’s possible to borrow and buy these things too, which some speculators do if they think they will go up. Why wouldn’t that result in excessive valuations? With no cash flow, it’s difficult to say what counts as excessive. There isn’t a calculation to do, it’s just vibes.
Also, using gold as a benchmark is a way of defining its value as constant, which is another way of discouraging such questions.