Take a look at any capitalist endeavour and you can be pretty damn sure something is being arbitraged.
Time, competence, incompetence, skills, labour, taxation variances, speed of manufacturing, cost of manufacturing, speed of distribution, cost of distribution, distance, ease of business. The list is as endless as Charlie Sheen’s reasons for not staying sober.
Francois in Lille selling rhododendrons that end up on the boardroom desks in swanky London based investment banks on a Monday morning is arbitraging the fact that British Rail will absolutely undoubtedly and repeatedly cock up the delivery because the wrong shaped snow landed on the track… or some leaves on the track will cause delays, and now it’ll take 14 hours to get form Surrey to London Bridge.
And so instead lucky Francois can send them via the Chunnel and, together with these guys…
…it’ll definitely get there — and on time.
I know all this because a buddy of mine runs a courier business in London doing just this — all with a smartphone and laptop while sitting at a beach house in New Zealand. Who doesn’t love technology?
Even at an arbitrary level it’s happening.
When I bought my last smartphone I didn’t trot down to the local electronics store to do so. No siree.
Onto the interwebs I went and sourced the same product direct from a Hong Kong supplier for 35% cheaper than my local mall down the road.
And that’s delivered to my door, which means that my blood pressure is much better since I don’t have to deal with the dunderhead teenagers at the mall on minimum wage sporting an attitude and who don’t want to be bothered with talking to customers anyway. Win-win!
Of course, those same electronics stores aren’t doing much more than I did. They’re just arbitraging (buying and selling across geographies) and capturing the spread.
Warren Buffett, who I mentioned a couple weeks ago, arbitrages impatience and we should all take out our little notepads and scribble this down in double bold and triple underlined so that we repeat it to ourselves each night before bed:
If you buy deep value and give yourself enough time, it is very difficult to muck it all up.Click To Tweet
Arbitrage of some description is happening all the time all over the world — domestically, internationally, and in literally anything you can think of.
Take a look at the US 10-year yield (orange) and the German bund 10-year (purple) below. Right now you’re earning more on the US than the German while historically that’s not the case. Hmmm…
Well, that all depends on your view on the currency cross. But here’s something else to ponder because I’ve a feeling we’re going to see some serious arbitrage taking place with key global powers swinging at the ball.
Take a look at what’s been happening in the cryptocurrency markets.
Russia has flip flopped between banning Bitcoin, (only to find that banning a decentralised peer-to-peer network isn’t quite that simple), taxing miners, and haphazardly regulating the ICO market.
Basically, they don’t really know what the hell to do. But rest assured this is a centralised political power so don’t expect them to go quietly into the night allowing decentralised networks and currencies to flourish. That dog won’t hunt.
The Ruskies are one to watch, though, because they’ve some serious ambitions to drag themselves out of being a one trick energy pony to being a credible global rival, and some of my sources who are significant players in the country tell me they’re desperately trying to figure out how to co-opt this creature for their own means. I don’t doubt that.
The problem is fire and ice don’t mix and make no bones about it — centralised and decentralised are fire and ice.
South Korea are still trying to figure this all out as their populace has gone completely doolally over crypto trading, to such an extent that the won accounted for over 10% of Bitcoin trading volume and was —get this — numero uno in Ethereum, which, given that the entire population of South Korea is not much more than that of California, is pretty remarkable.
In fact, one thing that has led to the enormous growth of trading in South Korea is the access points, specifically banking.
As it turns out, many of the major banks over there provide local cryptocurrency exchanges with virtual bank accounts.
So what this means is that each trader, speculator, and wannabe lambo driver doesn’t even need an actual bank account.
Now, as you can imagine this is significant, because the last time I tried to setup a bank account in Europe I had to provide a library of paperwork and then more paperwork.
And even when all was said and done — after months of torture — still nothing is easy.
I’ll ring a cheerful computer that asks me to provide identification via pin numbers and then fails to understand me. And even when I give my very best German accent, it still didn’t understand me. And so finally I get transferred to some guy in India who’d start the entire process all over again and, as happened the other day, annoyingly will transfer me to Mariah Carey, who through a phone earpiece sounds awfully like a cat going through a bandsaw.
It’s a bloody mess and blockchain, as impractical and clunky as it is today, is still a gazzilion times better. The trouble is in getting in and out of the fiat world.
Anyway, South Korea aren’t anti-crypto or anything but clearly they’re concerned about rampant speculation — as they damned well should be.
And of course, we all know that China has been fighting capital flight and the decentralised nature of blockchain currencies (Bitcoin simply being the most well known) circumvent such controls. That makes it a clear and present danger.
So what’s the market going to do?
What it always does.
Players will enter to provide less friction where friction is increased. The greater the friction the greater the arbitrage — that’s just common sense. This is why Colombian drug dealers drive lambos, too.
Right now, regulators all over the world are trying to figure this all out. Some countries, like China, are openly hostile to it as it usurps their power to steal. Others are less antagonistic but there is one clear leader that seems to me to be standing head and shoulders above all others.
Our sake-drinking friends have already legalised Bitcoin as a currency in April of last year. And since then over a dozen crypto exchanges have been officially recognised.
Make no mistake — Japanese regulators and indeed the BOJ see cyrpto and blockchain development as a path forward for a country that’s been wallowing in deflation for what feels like an eternity. And here’s the juice in the orange: China will hate them for it as will any country that cracks down.
And they’ll not care because their relationship with China has never been a good one. Being able to stick it to them is quite simply a matter of national pride.
The other thing that makes Japan unique is that they really, really don’t care about the value of the yen, so long as it’s not going higher.
Anything, literally, that pushes money out of yen savings accounts into the broader economy is to them better than the alternative. And don’t send me emails telling me this is a dumb idea. Heck, most of what central banks do is a dumb idea. What matters is what’ll happen — dumb or not.
Japan, for all its faults, is set to become THE crypto gateway for the world. And if you’ve been paying just a little bit of attention to Kuroda-san and his clan, you’ll notice that they will — and do — do as they please, the world be damned.
One More Thing…
Remember that abomination of an idea called FATCA?
You know, the one that literally puts the onus on banks, which are domiciled outside of the US, have no US shareholders, no US board members, don’t take US clients, and don’t even serve apple pie in their canteens, to comply with onerous regulations — all in the name of stopping money laundering and terrorist financing.
Well, how does that all work when an entire market is developed where peer-to-peer transactions take place in the blink of an eye on decentralised exchanges (they’re coming)?
Well, all of this is like a pimple on a prom queen. It’s going to come to a head, and when it does entire countries are going to have to decide how they lean.
Now, if you’d asked me 10 years ago where things would have headed, I’d had unequivocally come down on the view that yes, THE MAN will prevail and global coordination between governments, central banks, and the various sclerotic hangers on to the sorry carcass would all move in one direction – together.
Sure, there’d need to be some arm bending and maybe even a baseball bat to the odd knee but the path was pretty well set.
Today? Not a chance.
Today, as I pointed out when discussing the rise of the strong men:
- Political cohesion and stability can no longer be relied upon as politics becomes inward looking with everything from trade deals to central bank swap lines being renegotiated or cancelled altogether.
- Global coordinated central bank action. The era of global coordinated monetary policy which we’ve been experiencing since the GFC, especially with the three largest players (ECB, FED and BOJ), will be looked back upon with nostalgia by the current clutch of central bankers who muddy the halls of power. Policy will increasingly be driven with greater sensitivity to nationalist rather than international concerns, which brings me to…
- Liquidity in the financial system which has stemmed from easing monetary policy is already contracting. In a world where derivatives traverse borders, connecting financial systems like never before, a liquidity crisis presents enormous tail risk in a leveraged world.
The new kid on the block that is so very powerful is blockchain technology. Who will use it and how?
I’ve a feeling we’re going to find out.
Thanks for reading!
“Bureaucracy defends the status quo long past the time when the quo has lost its status.” — Laurence J. Peter