Why Water Will Soon Become More Valuable Than Oil

If you think that an energy shortage is bad, it will pale in comparison to the next water crisis. So, investment in freshwater infrastructure is going to be a great recurring long-term investment theme.

One theory about the endless wars in the Middle East since 1918 is that they have really been over water rights.

Although Earth is often referred to as the water planet, only 2.5% is fresh, and three quarters of that is locked up in ice at the North and South poles. In places like China, with a quarter of the world’s population, up to 90% of the fresh water is already polluted, some irretrievably so by heavy metals.

Some 18% of the world population lacks access to potable water, and demand is expected to rise by 40% in the next 20 years.

Aquifers in the US, which took nature millennia to create, are approaching exhaustion especially in Northern India and California’s Central Valley. While membrane osmosis technologies exist to convert seawater into fresh, they use ten times more energy than current treatment processes, a real problem if you don’t have any, and will easily double the end cost of water to consumers.

While it may take 16 pounds of grain to produce a pound of beef, it takes a staggering 2,416 gallons of water to do the same. Beef exports are really a way of shipping water abroad in highly concentrated form. Hence, the spectacular performance of fake meat producer Beyond Meat (BYND) this year (try one, they’re not so bad).

The UN says that $11 billion a year is needed for water infrastructure investment, and $15 billion of the 2008 US stimulus package was similarly spent.

It says a lot that when I went to the University of California at Berkeley School of Engineering to research this piece, most of the experts in the field had already been retained by major hedge funds!

At the top of the shopping list to participate here should be the Claymore S&P Global Water Index ETF (CGW), which has appreciated by 14% since the October low.

You can also visit the PowerShares Water Resource Portfolio (PHO), the First Trust ISE Water Index Fund (FIW), or the individual stocks Veolia Environment (VE), Tetra-Tech (TTEK), and Pentair (PNR).

Who has the world’s greatest per capita water resources? Siberia, which could become a major exporter of H2O to China in the decades to come.





WaterfallThe New Liquid Gold?

Whatever Happened to the Great Depression Debt?

When I was a little kid during the early 1950s, my grandfather used to endlessly rail against Franklin Delano Roosevelt.

The WWI veteran, who was mustard-gassed in the trenches of France and was a lifetime dyed-in-the-wool Republican, said the former president was a dictator and a traitor to his class who trampled the constitution with complete disregard.

Republican presidential candidates Hoover, Landon, and Dewey would have done much better jobs.

What was worse, FDR had run up such enormous debts during the Great Depression that would ruin not only my life but my children’s as well.

As a six-year-old, this disturbed me deeply as it appeared that just out of diapers, my life was already going to be dull, brutish, and pointless.

Grandpa continued his ranting until a three-pack a day Lucky Strike non-filter habit finally killed him in 1977.

He insisted until the day he died that there was no definitive proof that cigarettes caused lung cancer even though during his war, they referred to them as “coffin nails.”

He was stubborn as a mule to the end. And you wonder who I got it from?

What my grandfather’s comments did do was spark in me a lifetime interest in the government bond market, not only ours, but everyone else’s around the world.

So, whatever happened to the despised, future-destroying Roosevelt debt?

In short, it went to money heaven.

And here, I like to use the old movie analogy. Remember when someone walked into a diner in those old black and white flicks, checked out the prices on the menu on the wall. It says “Coffee: 5 cents, Hamburgers: 10 cents, Steak: 50 cents.”

That is where the Roosevelt debt went.

By the time the 20 and 30-year Treasury bonds issued in the 1930s came due, WWII, Korea, and Vietnam happened, and the great inflation that followed.

The purchasing power of the dollar cratered, falling roughly 90%. Coffee is now $1.00, a hamburger at MacDonald’s is $5.00, and a cheap steak at Outback cost $12.00.

The government, in effect, only had to pay back 10 cents on the dollar in terms of current purchasing power on whatever it borrowed in the thirties.

Who paid for this free lunch?

Bond owners who received minimal and often negative real, inflation-adjusted returns on fixed-income investments for three decades.

In the end, it was the risk avoiders who picked up the tab. This is why bonds became known as “certificates of confiscation” during the seventies and eighties.

This is not a new thing. About 300 years ago, governments figured out there was easy money to be had by issuing paper money, borrowing massively, stimulating the local economy, creating inflation, and then repaying the debt in devalued future paper money.

This is one of the main reasons why we have governments, and why they have grown so big. Unsurprisingly, France was the first, followed by England and every other major country.

Ever wonder how the new, impoverished United States paid for the Revolutionary War?

It issued paper money by the bale, which dropped in purchasing power by two thirds by the end of conflict in 1783. The British helped too by flooding the country with counterfeit paper Continental money.

Bondholders can expect to receive a long series of rude awakenings sometime in the future.

No wonder Bill Gross, the former head of bond giant PIMCO, says will get ashes in his stocking for Christmas next year.

The scary thing is that, eventually, we will enter a new 30-year bear market for bonds that lasts all the way until 2049. However, after last month’s frenetic spike up in bond prices, and down in bond yields, that is looking more like a 2022 than a 2019 position.

This is certainly what the demographics are saying, which predicts an inflationary blow-off in decades to come that could take short term Treasury yields to a nosebleed 12% high once more.

That scenario has the leveraged short Treasury bond ETF (TBT), which has just cratered down to $23, double to $46, and then soaring all the way to $200.

If you wonder how yields could get that high in a decade, consider one important fact.

The largest buyers of American bonds for the past three decades have been Japan and China. Between them, they have soaked up over $2 trillion worth of our debt, some 12% of the total outstanding.

Unfortunately, both countries have already entered very negative demographic pyramids, which will forestall any future large purchases of foreign bonds. They are going to need the money at home to care for burgeoning populations of old age pensioners.

So, who becomes the buyer of last resort? No one, unless the Federal Reserve comes back with QE IV, V, and VI. QE IV, in fact, has already started.

There is a lesson to be learned today from the demise of the Roosevelt debt.

It tells us that the government should be borrowing as much as it can right now with the longest maturity possible at these ultra-low interest rates and spending it all.

With real inflation-adjusted 10-year Treasury bonds now posting negative yields, they have a free pass to do so.

In effect, the government never has to pay back the money. But they do have the ability to reap immediate benefits, such as through stimulating the economy with greatly increased infrastructure spending.

Heaven knows we need it.

If I were king of the world, I would borrow $5 trillion tomorrow and disburse it only in areas that create domestic US jobs. Not a penny should go to new social programs. Long-term capital investments should be the sole target.

Here is my shopping list:

$1 trillion – new Interstate freeway system
$1 trillion – additional infrastructure repairs and maintenance
$1 trillion – conversion of our energy system to solar
$1 trillion – construction of a rural broadband network
$1 trillion – investment in R&D for everything

The projects above would create 5 million new jobs quickly. Who would pay for all of this in terms of lost purchasing power? Today’s investors in government bonds, half of whom are foreigners, principally the Chinese and Japanese. Notice that I am not committing a single dollar in spending on any walls.

How did my life turn out? Was it ruined, as my grandfather predicted?

Actually, I did pretty well for myself, as did the rest of my generation, the baby boomers.

My kids did OK too. One son just got a $1 million two-year package at a new tech startup and he is only 30. Another is deeply involved in the tech industry, and my oldest daughter is working on a PhD at the University of California. My two youngest girls are about to become the first-ever female eagle scouts.

Not too shabby.

Grandpa was always a better historian than a forecaster. But did have the last laugh. He made a fortune in real estate, betting correctly on the inflation that always follows big borrowing binges.

You know the five acres that sits under the Bellagio Hotel in Las Vegas today? That’s the land he bought in 1945 for $500. He sold it 32 years later for $10 million.

Not too shabby either.

40 Years of 30 Year Bond Yields



Welcome to the Land of Zeros

Jay Powell really showed his hand today with the press conference following his 25-basis point interest rate cut.

The Fed’s medium-term target rate is now zero. Take a 1.75% inflation rate, subtract a 1.75% overnight rate and you end up with a real interest rate of zero. The fact that we have real economic growth also at zero (1.75% GDP – 1.75% inflation) makes this easier to understand.

That means there will be no more interest rate cuts by the Fed for at least six more months. All interest rate risks are to the downside. There is no chance whatsoever of the Fed raising rates in the foreseeable future with a growth rate of 1.75%. It will also take a substantial fall in the inflation rate to get rates any lower than here.

That may happen if the economy keeps sliding slowly into recession. Net net, this is a positive for all risk assets, but not by much.

I regard every Fed day as a free economics lesson from a renown professor. Over the decades, I have learned to read through the code words, hints, and winks of the eye. It appears that the thickness of the briefcase no longer matters as it did during Greenspan. No one carries around paper anymore during the digital age.

I then have to weed through the hours of commentary that follows by former Fed governors, analysts, and talking heads and figure out who is right or wrong.

In the meantime, the “Curse of the Fed” is not dead yet. The ferocious selloffs that followed the last two Fed rate cuts didn’t start until the day or two after. That’s what the bond market certainly thinks, which rallied hard, a full two points, after the announcement.

All of this provides a road map for traders for the coming months.

The Santa Claus rally will start after the next dip sometime in November. Buy the dip and ride it until yearend. The Mad Hedge Market Timing Index at 75, the bond market (TLT), the Volatility Index (VIX) and the prices of gold (GLD), silver (SLV), and the Japanese yen (FXY) are all shouting this should happen sometime soon.

I hope this helps.

John Thomas





Thank Goodness I Don’t Live in Sweden!

I recently found the chart below showing world tax rates as a percentage of GDP for the past 40 years. Sweden suffers the world’s heaviest tax burden at 51%, compared to only 27% in the US.

The US has among the world’s lowest tax burdens in terms of actual taxes paid which has been falling for the last 15 years.

Listening to TV pundits, you would think we had the world’s highest tax rates. They are dead wrong.

Germany, home to some of the world’s best-run and most profitable companies which make the Fatherland a major exporter, has one of the lowest tax bills.

Iceland sits at the bottom and recently went bankrupt, thanks to an overdose of free-market deregulatory philosophy.

Americans historically have had a very strong resistance to taxation which you can trace back to the libertarian foundations of the country.

The Revolutionary War in which 17 of my known ancestors fought was primarily about taxes.

The top end of the distribution is packed with European nations but you never hear them complain about high tax rates.

Most believe the cost of the social safety net is worth it. Those that don’t move to the US, Monte Carlo, Lichtenstein, or the British Virgin Islands.

Of course, having once been a part owner in a fashion model agency in Stockholm, I can certainly vouch for the advantages of living in the world’s most taxed domicile. Hedge fund profits go a long way there.

Suffice to say, you spend a lot of time indoors in the home of the Vikings, especially in the winter.

Things could be worse.



Well, Maybe It’s Not So Bad After All

The Market Outlook for the Week Ahead, or Visibility is Poor

I have a pretty good view from my home on a mountaintop in San Francisco.

To the west, I can see through the Golden Gate Bridge all the way out to the Farallon Islands 20 miles off the coast. To the south, there is Stanford’s Hoover Tower and all of Silicon Valley. In the winter I can look east and see the snow-covered High Sierras 200 miles away.

However, during last year’s wildfires, I couldn’t see a thing. Visibility ended at 100 yards, the cars parked outside were covered in ash, and I could barely breathe. We were all confined indoors.

I kind of feel that’s the way the stock market is right now. You can’t see a thing, so it’s better to stay indoors.

Not only are market gyrations subject to unpredictable and random, out-of-the-blue influences. The old playbook about cross market correlations and how asset classes respond at different points of the economic cycle doesn’t work either.

The good news is that August is over, the second worth trading month of the year. The bad news? September is the WORST trading month of the year!

So, what does a trader do on the first day of the worst investment month of the year?


That’s what I’ll be doing, waiting for the next cataclysmic collapse to buy or the next euphoric bubble to sell short. Until then, I’ll be sitting tight. Just running my existing long/short trading book, I’ll be up 3.4% by the September 20 option expiration date in 15 trading days.

There is one BIG positive for the economy that no one is talking about. The home ATM is open for business, and open like it’s never been open before.

The thirty-year fixed rate mortgage rate is now at 3.56%, 10 basis points over a decade low and 20 basis points above an all-time low (see the chart below). There are currently $9.4 trillion of outstanding home mortgages in the US. Some $5 trillion is in Fannie Mae and Freddie Mac conforming loans, some 90% of which have interest rates higher than the current market.

If just ten million of these mortgages refinance obtaining an average of $4,560 in annual savings each, that will amount to a de facto tax cut of $456 billion per year, not an inconsequential amount. And Goldman Sachs thinks we could be in for as much as 37 million refis. It could be enough to offset the negative impact of the trade war.

As for the past week, it seemed like a disaster a day.

Trump ordered all US companies out of China. Like you can reverse 40 years’ worth of trillions of dollars of investment with a Tweet. If they did, an iPhone would cost $10,000 and your low-end laptop $15,000. An escalation of the trade war is the last thing your 401k wanted to hear. Kiss that early retirement goodbye.

Oil crashed (USO) on trade war escalation, with the industry now seeing a recession as a sure thing. Russian cheating on quotas is pouring the fat on the fire creating a massive supply glut in the face of shrinking demand. Take a long nap before considering any energy investment (XLE). The long-term charts show they are all going to zero.

Prime Minister Boris Johnson suspended Parliament, prompting a free fall in the pound. It’s to keep Parliament from blocking his hard Brexit, where it would certainly loose by a landslide. It’s all up to the Queen now, the monarch, not the rock group.

The yield inversion is deepening, with the US Treasury selling two-year notes today at a 1.56% yield, with ten-year yield closing at 1.45%. And that’s with the Treasury selling a total of a gob smacking $113 billion worth of bonds last week, which should have driven rates UP! US ten-year TIPS now showing negative interest rates.

Company stock buy backs are fading. That’s a big deal as corporations retiring their own shares have been the biggest buyers in the market for the past two years. As if you needed another reason for downside risk.

US 15% tariffs hit on Sunday, and the Chinese paused in retaliation. Christmas is about to get more expensive. Many large retailers won’t make it until the new year. Keep selling short Macy’s (M) on rallies.

Bond yields hit new lows, at 1.44% for ten-year US Treasury bonds. The next stop is zero. Fixed income markets are saying that a recession is imminent. “Inversion” will be the world of the year for 2019. Go refi that home if you can get a banker on the phone!

There is no way out of the next recession, says hedge fund titan Ray Dalio. With global rates below zero, you can’t cut to stimulate business. You can’t do any more quantitative easing either, as the world is already glutted with paper. This is the trap Japan has been caught in for the last 30 years. It is all sobering food for thought.

US growth slowed with the second reading of the Q2 GDP marked down from 2.1% to 2.0%. The downturn has continued since the economy peaked 18 months ago. Q3 will be much worse when the trade war and earnings downgrades hit big time. And then there’s the soaring deficit. Sow the wind, reap the whirlwind.

US Consumer Sentiment took a dive from 98.4 to 89.8 in August. Has the spending boom just peaked? If so, we’re all toast. The “tariff cliff” is already taking its toll.

The Mad Hedge Trader Alert Service has posted its best month in two years. Some 22 or the last 23 round trips, or 95.6%, have been profitable, generating one of the biggest performance jumps in our 12-year history.

My Global Trading Dispatch has hit a new all-time high of 334.48% and my year-to-date shot up to +34.35%. My ten-year average annualized profit bobbed up to +34.30%. 

I raked in an envious 16.01% in August. All of you people who just subscribed in June and July are looking like geniuses. My staff and I have been working to the point of exhaustion, but it’s worth it if I can print these kinds of numbers.

As long as the Volatility Index (VIX) stays above $20, deep in-the-money options spreads are offering free money. I am now 60% invested, 40% long big tech and 20% short Walmart (WMT) and the Russell 2000, with 20% in cash. It rarely gets this easy.

The coming week will be all about jobs, jobs, jobs.

Monday, September 2, markets were closed for the US Labor Day.

Today, Tuesday, September 3 at 10:00 AM, the August ISM Purchasing Manager’s Index is out.

On Wednesday, September 4, at 2:00 PM, the Fed Beige Book for July is published.

On Thursday, September 5 at 8:30 AM EST, the Weekly Jobless Claims are printed. At 10:30, we learn the ADP Report for private hiring.

On Friday, September 6 at 8:30 AM, the August Nonfarm Payroll Report is printed.

The Baker Hughes Rig Count follows at 2:00 PM.

As for me, I’ll be filling out the paperwork for my own home refi. JP Morgan Chase Bank (JPM) is offering the best deals, in my case a 30-year fixed rate no-cash-out jumbo loan for only 3.4%. Now where did I put that tax return?

Good luck and good trading.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader









A Very Bright Spot in Real Estate

I feel obliged to reveal one corner of this bubbling market that might actually make sense.

By 2050 the population of California will soar from 39 million to 50 million, and that of the US from 320 million to 400 million, according to data released by the US Census Bureau and the CIA Fact Book (check out the two population pyramids below).

That means enormous demand for the low end of the housing market, apartments in multi-family dwellings.

Many of our new citizens will be cash-short immigrants. They will be joined by generational demand for limited rental housing by 65 million Gen Xer’s and 85 million Millennials enduring a lower standard of living than their parents and grandparents.

These people aren’t going to be living in cardboard boxes under freeway overpasses.

If you have any millennial kids of your own (I have three!), you may have noticed that they are far less acquisitive and materialistic than earlier generations.

They would rather save their money for a new iPhone than a mortgage payment. Car ownership is plunging as the “sharing” economy takes over.

This explains why the number of first time homebuyers, only 32% of the current market now, is near the lowest on record.

It’s not like they could buy if they wanted to.

Remember that this generation is almost the most indebted in history, with $1.5 trillion in student loans outstanding.

They don’t care. Coming of age since the financial crisis, to them, home ownership means falling prices, default, and bankruptcy. Bring on the “renter” generation!

The trend towards apartments also fits neatly with the downsizing needs of 85 million retiring Baby Boomers.

As they age, boomers are moving from an average home size of 2,500 sq. ft. down to 1,000 sq ft condos and eventually 100 sq. ft. rooms in assisted living facilities.

The cumulative shrinkage in demand for housing amounts to about 4 billion sq. ft. a year, the equivalent of a city the size of San Francisco.

In the aftermath of the economic collapse, rents are now rising dramatically, and vacancy rates are shrinking, boosting cash flows for apartment building owners.

Fannie Mae and Freddie Mac financing is still abundantly available at the lowest interest rates on record. Institutions combing the landscape for low volatility cash flows and limited risk are starting to pour money in.

Run the numbers on the multi-dwelling investment opportunities in your town. You’ll find that the net after-tax yields beat almost anything available in the financial markets.


America’s Demographic Time Bomb

With the report this week that America’s birthrate has fallen to a new multi decade low of 1.77 children per family, it is time to once again visit the issue of demographics.

They’re just not making Americans anymore, at least not as fast as they used to. That is far below the replacement rate of 2.1 children per family.

This has long term dire implications for the economy.

You can never underestimate the importance of demographics in shaping investment trends, so I thought I’d pass on these two highly instructive maps.

The first shows a picture of the world drawn in terms of the population of children, while the second illustrates the globe in terms of its 100-year olds.

Notice that China and India dominate the children’s map. Kids turn into consumers in 20 years, stay healthy for a long time, and power economic growth.

The US, Japan, and Europe shrink to a fraction of their actual size on the children’s map, so economic growth is in a secular downtrend there.

There is more bad news for the developed world on the centenarian’s map, which show these countries ballooning in size to grotesque, unnatural proportions.

This means higher social security and medical costs, plunging productivity, and falling GDP growth. If you wonder where our mediocre 2% annual growth rate came from, this is a big cause.

The bottom line is that you want to own equities and local currencies of emerging market countries, and avoid developed countries like the plague.

This is why we saw tenfold returns from some emerging markets (EEM) over the past ten years, and why there is an irresistible force pushing their currencies upward (CYB) over the long term.

Use any major meltdowns this year to increase your exposure to emerging markets (EEM), as I will.

Would You Rather Own Them?

Or Them?


Is There a Bitcoin in Your Future?

I often am asked at lunches and speaking engagements whether people should be investing in bitcoin. My answer was always that it was a scam and to be avoided at all costs.

I was vindicated when the value of the online cryptocurrency collapsed 74% from its peak, from $1,230 to $320 to the US dollar.

After all, why should an arbitrarily valued currency, like bitcoin, be worth more than any other, like the US dollar?

I really hope the pizza parlor in New York City that sold a pizza for 8 bitcoins years ago unloaded their proceeds before the crash.

After some major security upgrades, the cryptocurrency has since rallied back up to $670.

Then Marc Andreessen, of leading venture capital firm, Andreessen Horowitz, made some comments the other day that piqued my interest.

He said that he was a major investor in several parts of the bitcoin ecosystem. He thought it had a great long-term future and he was especially interested in bitcoin infrastructure plays.

Smelling a rare opportunity to smash my own preconceived notions, biases, and prejudices, I started making a few phone calls around Silicon Valley.

It wasn?t long before someone put me in touch with Mr. Celso Pitta, the CEO of BTCJam. BTCJam is the world?s first peer-to-peer bitcoin lending company and they are paving the way for alternative crypto-currency investing.

What I learned from him was fascinating.

Long considered a ?gold for nerds? and ?online gold?, the financial community is in fact taking bitcoins seriously. Recently, the US Treasury and the Department of Homeland Security held a conference in Florida to bring the industry into its anti-money laundering payments standards.

Where do bitcoins come from? Bitcoins are ?mined? by computers. Every couple of minutes the bitcoin network releases an algorithm and the computer that solves the algorithm first, receives the bitcoin.

They are created from scratch by bitcoin ?miners? who exchange them for local currencies to cover their own costs and compensation for the bitcoin infrastructure.

Bitcoins are a completely decentralized, transparent, and digitally traded currency. Some predict that cryptocurrencies like bitcoin may replace traditional fiat paper currencies in the near future.

In the end, bitcoins are just a giant global payment ledger balanced out by debtors and creditors. As it is electronic, it can be sent and administered for free.

BTCJam has created from scratch a global online marketplace of borrowers and lenders in over 180 countries. Go to their site (https://btcjam.com) and you will find a parade of borrowers from around the planet looking to take out loans and bitcoin lenders looking to invest. Look at the individual players and it is clear that they are young and tech savvy.

Each potential borrower lists the details for their loan, along with a host of personal information. The purposes cited I found included a new transmission for a broken down car in England, a vacation to Japan and the start up of many small business. It also seems a lot of young Americans are seeking to consolidate student loans.

Once a user signs up, BTCJam subjects every application to its credit evaluation software, which examines more than 300 different parameters.

BTCJam uses traditional data that banks use such as personal identification, banking confirmation, and income verification, but they also use a host of other resources such as: LinkedIn, Facebook, PayPal, and eBay accounts.

Believe it or not, a person with 1000 Facebook friends has a much better credit standing and a lower default rate than someone with only 1 friend.

Customers are then given an ?A? to ?E? rating based on their loan algorithm. This software was developed by CEO Pitta, a native of Brazil, who boasts a heavy background in artificial intelligence and facial recognition software.

The company is taking advantage of the void of lending resources in emerging nations; frequently, these people can only turn to loan sharks and other risky loan sources.

Large international banks are reluctant to invest in these places because of the local currency risk. When a loan on BTCJam is fully funded, the borrowers convert their bitcoin into local currencies to spend in the local economy.

Remember how the poorest countries leapfrogged telephone landlines and went straight to cell phones 20 years ago? Well, the same thing is now happening in consumer credit through peer-to-peer lending.

Many developing countries suffer from the complete lack of credit rating agencies. There, every client is considered high risk, and lending is priced according to the standards of the worst borrowers.

Credit card interest rates run as high as 200% in Brazil, 90% in Mexico, and are well into double digits in Indonesia and the Philippines. Overall, they average 175% in the BRICS. As a result, the rates charged by BTCJam seem like a bargain by comparison.

When borrowers sign up at BTCJam and input all their information, they are given a suggested interest rate. They then have the choice to set their monthly interest rate as high or low as they want.

Loans that follow the suggested interest rate are more likely to be funded quickly by investors. Over time, the loan is gradually paid back in full by the borrower as they convert their money back into bitcoin.

Now for the lender side of the equation. BTCJam has investors from all over the world: they attract people that already have bitcoins and are looking for returns on their bitcoins. They also bring in lenders who are new to bitcoin and buy a few for the purpose of investing in BTCJam.

Lenders are completely free to choose which loans they want to invest in and how much they want to invest. Interest rates vary based on the risk profile of the borrower. They range all the way from 14% for the highest quality ?A+? borrowers to 100% for the low-end ?E-? hopefuls.

BTCJam is a bitcoin-only platform: lenders invest bitcoin and borrowers receive bitcoin. Borrowers have the option to link their loan to USD, which helps them avoid the risk of volatility long term. This enables them to lock in the bitcoin price at the time they receive the loan.

BTCJam lists every outstanding loan, and the investors connected to that individual. There is an online discussion on the potential advantages and disadvantages of each borrower. Some of the comments are quite funny. Others are downright rude.

It gets better: BTCJam will soon introduce automatic investments. Lenders will then have the opportunity to set specific criteria such as: the amount they want to invest, which asset class they want to invest in, and for how long. This will significantly enhance the use of the website and lenders will never have to miss out on good loans.

Pitta told me that globally, the total loan portfolio has a 10% default rate. But if you focus on only their ?A? rated customers, that rate plunges to a mere 1.8%. This is in the same ballpark as the largest US consumer lenders.

Do the math with high yields and a non-payment rate this low, and you can easily see that risk sophisticated and tolerant depositors will do these loans all day long.

The peer-to-peer lending model is one of the fastest growing corners of the financial industry. The giant Credit Ease in China is the largest, with a $9 billion loan portfolio. They are followed by the $3-$4 billion Lending Club. The UK has Zopa, with a $1 billion loan book.

This all compares to total credit card debt for the US alone of $1 trillion. Clearly, there is an enormous, high cost, low return, entrenched market to be explored here.

The entire bitcoin story did get tarnished by the bankruptcy of Mt. Gox operation in Japan, which went under with $60 million in liabilities. They claimed they were the victims of the hackers.

Industry insiders say that incompetent management, inferior software, and lax controls are much more likely culprits. These
are common transgressions in every start up industry.

Which brings me to BTCJam?s own business model, which recently obtained several million in seed capital from venture capitalists, like Ribbit Capital and the Founders Club.

They are poised to eat the lunches of emerging nation banks, which have always ignored, overcharged, or abused their local customers. It all seems to me ripe ground for disruption.

I think it is safe to say that in 20 years, the global financial system will be unrecognizable from what it is today. Ultimately, Bitcoin and BTCJam may have a large influence in the transition from traditional currencies to an all out system of online money.


Loans by Location


Why Water Will Soon Become More Valuable Than Oil

If you think that an energy shortage was bad, it will pale in comparison to the next water crisis. So investment in fresh water infrastructure is going to be a great recurring long-term investment theme.

One theory about the endless wars in the Middle East since 1918 is that they have really been over water rights.

Although Earth is often referred to as the water planet, only 2.5% is fresh, and three quarters of that is locked up in ice at the North and South poles.

In places like China, with a quarter of the world?s population, up to 90% of the fresh water is already polluted, some irretrievably so.

Some 18% of the world population lacks access to potable water, and demand is expected to rise by 40% in the next 20 years.

Aquifers in the US, which took nature millennia to create, are approaching exhaustion, especially in California?s Central Valley.

While membrane osmosis technologies exist to convert seawater into fresh, they use ten times more energy than current treatment processes, a real problem if you don’t have any, and will easily double the end cost of water to consumers.?

While it may take 16 pounds of grain to produce a pound of beef,?it takes a staggering 2,416 gallons of water?to do the same. Beef exports are really a way of shipping water abroad in highly concentrated form.

The UN says that $11 billion a year is needed for water infrastructure investment and $15 billion of the 2008 US stimulus package was similarly spent.

It says a lot that when I went to the University of California at Berkeley’s School of Engineering to research this piece, most of the experts in the field had already been retained by major hedge funds!

At the top of the shopping list to participate here would be the Guggenheim S&P Global Water Index ETF (CGW).

You can also check out the PowerShares Water Resources Portfolio (PHO), the First Trust ISE Water Index Fund (FIW), or the individual stocks Veolia Environment (VEOEY), Tetra-Tech (TTEK) and Pentair (PNR).

Bonus Question:? Which country has the world?s greatest water resources? Siberia, which could become a major exporter of H2O to China in the decades to come.

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WaterfallThe New Liquid Gold?

China?s View of China

I ran into Minxin Pei, a scholar at the Carnegie Endowment for International Peace, who imparted to me some iconoclastic, out-of-consensus views on China?s position in the world today.

He thinks that power is not shifting from West to East; Asia is just lifting itself off the mat, with per capita GDP at $5,800, compared to $48,000 in the US.

We are simply moving from a unipolar to a multipolar world. China is not going to dominate the world, or even Asia, where there is a long history of regional rivalries and wars.

China can?t even control China, where recessions lead to revolutions, and 30% of the country, Tibet and the Uighurs, want to secede.

China?s military is entirely devoted to controlling its own people which make US concerns about their recent build up laughable.

All of Asia?s progress, to date, has been built on selling to the US market. Take us out, and they?re nowhere.

With enormous resource, environmental, and demographic challenges constraining growth, Asia is not replacing the US anytime soon.

There is no miracle form of Asian capitalism; impoverished, younger populations are simply forced to save more, because there is no social safety net.

Try filing a Chinese individual tax return, where a maximum rate of 40% kicks in at an income of $35,000 a year, with no deductions, and there is no social security or Medicare in return.

Ever heard of a Chinese unemployment office or jobs program?

Nor are benevolent dictatorships the answer, with the despots in Burma, Cambodia, North Korea, and Laos thoroughly trashing their countries.

The press often touts the 600,000 engineers that China graduates, joined by 350,000 in India. In fact, 90% of these are only educated to a trade school standard. Asia has just one world-class school, the University of Tokyo.

As much as we Americans despise ourselves and wallow in our failures, Asians see us as a bright, shining example for the world.

After all, it was our open trade policies and innovation that lifted them out of poverty and destitution. Walk the streets of China, as I have done for four decades, and you feel this vibrating from everything around you.

I?ll consider what Minxin Pei said next time I contemplate going back into the China (FXI) and emerging markets (EEM).

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China - ParadeChina: Not All It?s Cracked Up to Be