The SEC Weighs in on Cryptocurrencies

What Doc Eifrig's favorite indicator says today... 'You need to focus on one thing'... Bitcoin futures are live... The SEC weighs in on cryptocurrencies... This time is not different... Why the 'crypto' mania could continue...

Regular Digest readers know we're keeping an eye on the 'yield curve'...

In fact, as we've discussed, both Porter and Steve Sjuggerud agree that seeing the yield curve "invert" – where the spread between short- and long-term rates falls below zero – could be our first warning that the end of the bull market is near.

But our colleague Dr. David "Doc" Eifrig notes another powerful indicator you should be watching. And unlike interest-rate spreads, he says it's so simple, even a total novice can understand it. As he explained in his latest issue of Retirement Trader, out last Friday...

Why do investors constantly lose sight of what drives the economy? The stock market seems like a big, complex place. And we're always looking for some big, complex explanation for what drives the stock market up and down...

Instead, you need to focus on one thing. And the good news is that it's not hard to find or complicated to understand.

If you had to choose one indicator to predict the direction of stock prices, you should focus on the behavior of consumers.

As Doc noted, consumer spending makes up around 70% of our economy...

It determines the decisions of almost every business. It's the key driver in investment returns. And most important, as he showed Retirement Trader subscribers, changes in this metric are highly correlated to the stock market...

The growth in consumer confidence has a near-perfect record of showing which way the market will be heading. For nearly two decades now, changes in consumer confidence have tended to lead the market by a few months with startling regularity.

While the positive rate of growth in consumer confidence has dipped recently, it has still risen about 20% over the last year. This relationship suggests we could see another 20% gain for stocks.

Bottom line, you shouldn't expect this bull market to end until consumers stop spending.

Doc also noted that his extensive travels around the country have confirmed this bullish stance...

Everywhere I go, I see the signs of a strong economy. Airplanes are full. Contractors are busy. Homes are selling after being on the market for less than a week. Have you been out for holiday shopping yet? Every place I've gone to has been busier than I've seen in a decade. The broader numbers back those firsthand observations. Take your pick...

Real personal consumption expenditures have steadily been growing at 2% a year for a couple of years now. By itself, that's nearly enough to keep an economy healthy.

Holiday shopping has kicked off with a blast, too. The National Retail Federation suggests that 174 million Americans shopped over Thanksgiving weekend (10 million more than last year) and spent an average of $335. It projects total spending is up about 4% over last year. Online sales on Black Friday and Cyber Monday were up nearly 17% over last year, according to digital-marketing researcher Adobe Digital Insights.

In short, Doc says the bottom line is simple...

All signs say the economy remains healthy today. And this suggests the long bull market will continue...

While actual spending is up, confidence remains high as well. That suggests that spending will keep rising so long as consumers stay happy. Right now, they are happier than they've been in nearly two decades...



As the biggest part of our economy, we believe there's no better sign than confident consumers.

In the meantime, it has been another historic week for the poster child of today's speculative boom, cryptocurrencies...

Yesterday, bitcoin surged to a new all-time-high above $17,000, while the broad "crypto" market reached a valuation of more than $450 billion for the first time. (Today, it's already closing in on $500 billion.)

The latest records follow the launch of the first bitcoin futures contracts over the weekend. As financial-news network CNBC reported recently...

[The CBOE Futures Exchange] launched the bitcoin futures under the "XBT" ticker symbol on Sunday following a giant leap in the digital currency's price this year and a surge of investor interest...

The debut of the first futures contract on an established exchange was relatively orderly, in contrast to expectations of high volatility and traders short selling, or betting against, bitcoin.

Initial interest in the new bitcoin futures product appeared to overload CBOE's website, but the issue was quickly resolved...

The new futures also handled sharp price moves smoothly. About two hours after their 6 p.m. ET launch on Sunday, the new futures had climbed 10%, triggering a two-minute trading halt. By 10:05 p.m., the bitcoin futures had soared 20%, triggering a five-minute trading halt.

Trading volume has been slow so far... The CBOE said 20 firms traded 4,127 contracts through Monday's close, and trading was on pace for less than half that amount as of midday trading today.

But volumes are likely to grow as more firms begin to participate, and other exchanges begin offering futures, too. And the larger – and potentially bullish – implications remain. As we explained in the October 31 Digest...

These moves will allow 'big money' investors to easily buy bitcoin for the first time. Active futures and options markets would also pave the way for the first cryptocurrency exchange-traded funds ("ETFs"). These would make it easy for traditional "mom and pop" investors to speculate on cryptos, too.

In short, these moves suggest it is simply a matter of time before a massive amount of new money floods into these markets. And the results could be downright shocking.

Today, the total market value of bitcoin is about $105 billion, while the entire cryptocurrency market is valued at just over $180 billion.

If even a tiny fraction of individual and institutional investor money begins to flow into cryptos, we could easily see the broad market rise another 10 times or more. And should a real speculative mania take hold, the sky is truly the limit.

This week, the U.S. government also made its strongest statement on cryptocurrencies yet...

In a statement released Monday, U.S. Securities and Exchange Commission ("SEC") Chairman Jay Clayton was clear that the agency is closely watching the space for violations of securities law. From the statement...

It has been asserted that cryptocurrencies are not securities and that the offer and sale of cryptocurrencies are beyond the SEC's jurisdiction. Whether that assertion proves correct with respect to any digital asset that is labeled as a cryptocurrency will depend on the characteristics and use of that particular asset.

In any event, it is clear that, just as the SEC has a sharp focus on how U.S. dollar, euro and Japanese yen transactions affect our securities markets, we have the same interests and responsibilities with respect to cryptocurrencies.

This extends, for example, to securities firms and other market participants that allow payments to be made in cryptocurrencies, set up structures to invest in or hold cryptocurrencies, or extend credit to customers to purchase or hold cryptocurrencies.

Clayton also warned about potential consequences for companies using ICOs – or "initial coin offerings" – in particular. More from the statement (emphasis added)...

Coinciding with the substantial growth in cryptocurrencies, companies and individuals increasingly have been using initial coin offerings to raise capital for their businesses and projects...

These offerings can take many different forms, and the rights and interests a coin is purported to provide the holder can vary widely. A key question for all ICO market participants: "Is the coin or token a security?" As securities law practitioners know well, the answer depends on the facts...

By and large, the structures of initial coin offerings that I have seen promoted involve the offer and sale of securities and directly implicate the securities registration requirements and other investor protection provisions of our federal securities laws. Generally speaking, these laws provide that investors deserve to know what they are investing in and the relevant risks involved.

I have asked the SEC's Division of Enforcement to continue to police this area vigorously and recommend enforcement actions against those that conduct initial coin offerings in violation of the federal securities laws.

However, the statement also included a surprise...

Contrary to fears that the U.S. government could soon try to "ban" ICOs or even cryptocurrency trading, Clayton offered his support to the trend. He even encouraged investors to learn more...

We at the SEC are committed to promoting capital formation. The technology on which cryptocurrencies and ICOs are based may prove to be disruptive, transformative and efficiency enhancing. I am confident that developments in fintech will help facilitate capital formation and provide promising investment opportunities for institutional and Main Street investors alike.

I encourage Main Street investors to be open to these opportunities, but to ask good questions, demand clear answers and apply good common sense when doing so. When advising clients, designing products and engaging in transactions, market participants and their advisers should thoughtfully consider our laws, regulations and guidance, as well as our principles-based securities law framework, which has served us well in the face of new developments for more than 80 years.

We are undoubtedly in the midst of a cryptocurrency mania today...

Cryptocurrencies are suddenly all over the financial media. Astronomical price targets are becoming more common (bitcoin $1,000,000, anyone?). Folks who had never even heard of cryptos a few months ago are now asking us for advice. And as in every speculative mania, we're also hearing more and more reasons why "this time is different."

Of course, if you've been with us for long, you know that "this time" is never different. Sooner or later, every mania ends. Every bubble "pops." And while the underlying technology or trend that drove it may eventually fulfill its promise, history shows most investors lose their shirts long before it does.

Again, usually a situation like this would cause us to run the other direction...

We're contrarians at heart. And like Steve, we prefer to buy assets that are cheap and out of favor. And yet, we reluctantly admit that we continue to recommend small speculations in cryptos today.

Why?

Because despite the massive gains already... and despite the clear signs of "froth"... most folks still don't own any. In fact, we suspect most people still don't even know what a cryptocurrency is... or have a clue how to buy one.

Go ahead... ask a few random people. You may be surprised. Even here at Stansberry Research, where almost everyone is familiar with cryptocurrencies by now, only a handful of folks own any at all.

Make no mistake...

Cryptos are not an "investment." And they aren't for the rent money. You could lose every penny you put in them.

But if you can afford to speculate – and you have the discipline to keep your position sizes small – there's likely more upside ahead.

Most folks still don't own any cryptocurrencies today. We suspect that will change before the mania finally ends.

New 52-week highs (as of 12/11/17): Altius Minerals (ALS.TO), Arch Coal (ARCH), American Express (AXP), Cisco (CSCO), iShares Select Dividend Fund (DVY), WisdomTree Japan Hedged SmallCap Equity Fund (DXJS), iShares MSCI Singapore Capped Fund (EWS), Corning (GLW), Grubhub (GRUB), Microsoft (MSFT), ProShares Ultra S&P 500 Fund (SSO), and short position in Sprint (S).

In today's mailbag, more on the "boo birds"... and a subscriber confirms our thoughts on cryptos. What's on your mind? Let us know at feedback@stansberryresearch.com.

"Regarding Larry Hill's comments: I am always amazed at how someone who is clearly partisan writes in and accuses you of being so. He lambastes Congress for pushing a tax law that they haven't read, while ensuring ACA destruction and giving away Alaska oil. First of all, what is wrong with ACA destruction?! Second, did he read all 500 pages or is he just mouthing the talking points that the Democrats are putting out?!

"You did a very nice job of reminding him exactly how ACA was passed. Remember, it was a law that a majority of Americans did not want and it took all kinds of promises (not kept) to get certain Democrat representatives to sell out. Those folks were so disappointed with themselves that they left politics altogether. That is also why the Democrats lost control of the House in the very next election. Oh, by the way, I am a Libertarian and have no faith in politicians. Keep up the good work!" – Paid-up subscriber K. Hill (no relation to Larry)

"Hi there! First of all, I want to express a heartfelt thanks to the staff at Stansberry Research. I have been a Stansberry Flex member for about four years now, and the education I have received (and hopefully absorbed) has been priceless. I suppose I could calculate how good my returns have been (and they have been remarkable), but that does not tell the whole story.

"It is impossible to measure the impact you have made on my family. My wife and I both work in the non-profit arena, and we are overjoyed that we can continue to do so well into our retirement, knowing that we are managing our assets well. Four years ago, I did not know the difference between a stock and a bond. Now I can confidently manage a portfolio of stocks, bonds, options, and real estate, using proper asset allocation and trailing stops where needed. I am enjoying the bull market, but have my eye out for warning signs of the top, all thanks to you. Truly priceless!

"One thing you have taught me to watch for: cocktail party conversation, which brings me to the point of this email. At our recent holiday parties and gatherings, it was fascinating to hear what people are saying (or not saying) about the cryptocurrency craze.

"To summarize: people with money to invest are definitely talking about Bitcoin – they have noticed the crazy gains, but very few have actually invested. Many still feel that it is just a fad, destined for a crash. The average partygoer had heard of Bitcoin, but had no idea what was happening with the market, and seems intrigued by the idea of some big gains. People were DEFINITELY talking about it, but it feels like it is early in a giant bubble. Steve Sjuggerud will also be happy to know that NO ONE mentioned China. Not a word. Thanks again!" – Paid-up subscriber Chris Lang

Regards,

Justin Brill
Baltimore, Maryland
December 12, 2017