Check for yourself

One of the benefits of travel is seeing with your own eyes. Travel to China, and it's obvious their payments and transport systems are about 10 years ahead of our own. Not that we would read about that locally. China is bad, you see. 

Travel to Britain, and it's obvious (at least to me) that things are not going that well. Not because anything is as terrible as it is portrayed in the press. It's the same. The trains from London to the North of England are the same ones I used to travel on 20 years ago. Literally the same locomotives with the same names. The tube in London is the same (except the shiny new Elizabeth Line). They work fine, but they are old and there has been zero progress.

It’s not a particular surprise that most people don’t see decline either because decline is relative and our politicians can hide behind it. The status quo is failure. Everything should get better, always. Always more energy, always more production, always more leisure time. They are the measures.

It’s also telling that GDP in Britain has risen on average by 2.7% annually over the last decade but they have fallen massively behind. Why? Because GDP itself is a fraud, it's a pretend number that bears no relation to population. Only per capita counts and even then the number is made up (please see the Village Watchman from 2023). Britain has fallen massively behind over the last decade; GDP per capita is still at 2019 levels. 

So it was last week, with the “Deaths from inaction have no face”. We ought to compare against what could have been. We should already be in space, we should already have harnessed the limitless energy of the universe. We should also be using energy as money, since it is the only true measure of progress and the only thing that has equal measure across the universe.

The United Kingdom is many kilojoules poorer than it used to be. On its current trajectory Australia will be too. Getting out of the energy hole in Australia will be a lot easier here than for the UK and we will get out of it, but not yet. It will take the relative growth in wealth of another country to become obvious before we take meaningful action. 

There is an argument that in the Age of AI only energy will matter because everything else will be instantly produceable. It's become like that in software, we are very close now to just imagining software and the AI delivering it. The physical world will follow on a longer timeline; machines will produce anything you want and simply work out how to do it. 

Only energy will matter. Is it a coincidence that Microsoft has effectively sequestered Three Mile Island? Google has its own nuclear deal and Elon Musk has reportedly signed up Rolls Royce to acquire their modular nuclear reactors? 

Government statistics, GDP, inflation, all stories. You can see it in how many Brits believe their country is richer than Australia or the US. They believe the story. 

It is simple. How much energy do you have? Either as a country or as an investor.

Broken Calculator

The broken calculator problem is a maths puzzle where you must reach a target number using a calculator with specific broken keys (numbers or operations). It tests logical thinking and numerical flexibility by requiring participants to find alternative methods, like substituting subtraction in addition to circumvent broken buttons. It’s even in the NSW maths curriculum. 

The broken calculator can get more and more complicated, fewer keys or the removal of specific scientific functions. 

A researcher in Poland, Andrzej Odrzywolek, revealed this week that one single function and the number 1 can generate any standard real function. It is called EML, exponential minus log. His broken calculator would need only two buttons. 

With that one function on a scientific calculator and the number 1, you can generate anything else the calculator could have computed. 

He also helpfully charted the path from EML to other functions in this rather pretty diagram which lays out the number of steps from one function to another. 

Lots of the twitterati were chiming in and claiming that this is all ‘obvious’, but I suspect the best discoveries are obvious only in retrospect. His full paper is here. It’s not peer reviewed and I can’t find anything meaningful in the news about it, so it might be nonsense. These days however you can check if something is nonsense. So, I checked. Those of you looking for projects in Claude Code might do the same.

1. Give it the paper (and the supplementary paper)

2. Then ask it to write code that will produce Pi in terms of EML and 1. 

I would say it was non-trivial to do because Claude Opus took about 10 minutes to work it out and check it, with me prompting it to explain it in the way I wanted, but it seemed convinced.  

π = E( E( E(1, E(E(1, E( E(1, E(E(1, E(E(1,

 E(E(1, E(1, E(E(1,1),1))), 1)), E(1,1)) ), 1)), E( E( E(1, E(E(1, E(1, E(E(1,-1),1))), 1)), E( E(1, E(E(1, E(1, 

E(E(1,-1),1))), 1)), 1 ) ), 1 ) ) ), 1)), E( E(1, E(E(1, E(1, E(E(1,1),1))), 1)), E(1, E(E(1, 1), 1)) ) ), 1 )

Not exactly helpful for a human but it works. For a computer, to only have to work with a single function and 1 might be very helpful. Claude Code was very excited about this ‘discovery’. The paper is off for academic review and he’s either getting a Nobel prize or is being banished to undergraduate lectures forever. 

One of the things about the new era of AI that I like the most is that you can engage with things that would otherwise be way over your head. In this case the maths is over my head and the code required to check it is over my head but I can still use one to check the other and get an explanation of what is going on at a level I do understand. 

Goldman Sachs

The JP Morgan Bitcoin ETF launched this week. A solid start with positive inflows every day and they are heading towards $100 million quickly. Likely the product will be a slow grind as their advisers trickle client money in. 

It was enough to push Goldman Sachs into action. They have filed a Bitcoin Income ETF. The product will hold bitcoin and sell bitcoin options to generate income. It should outperform bitcoin in bear markets and underperform bitcoin otherwise. I’m not keen since it looks like a product designed to generate income elsewhere for the bank. Specifically, Goldman will probably be writing the options themselves, selling them to the fund, earning fees on both sides of the trade. Complexity for complexity’s sake I would say, but there is clearly demand for these ‘clever’ products, so good luck to them. 

Anyway, here are the Goldman slides from 2020 (that leaked) in which they told clients Bitcoin wasn’t an asset class, couldn't generate income and wasn’t investable. 

Welcome aboard. 

Nobody uses it

Not entirely cause for celebration that Iran has chosen to seek payment in bitcoin. Still, it's worth asking the question. Why? 

One of the best things that ever happened to Bitcoin was the seizure by the Biden administration of Russian Central Bank USD in overseas bank accounts. It was wildly stupid because it proved to the rest of the world, and China in particular, that any USD or US Treasuries they hold are worth as much as America decides they are worth. One of those outcomes is zero. 

As a consequence China accelerated their unloading of US Treasuries and began moving into other assets, notably gold. 

Recall too, every movie from 1950 - 2000 had the baddies accepting USD in suitcases. Everyone wants the liquid thing that they can sell and move instantly and will be accepted everywhere. It was once US dollars and it isn’t anymore. 

Tony Montana counts the loot in Scarface

Some will say this is bad for bitcoin. If we reflect for a moment though; the internet in Iran has been down for months, the infrastructure is slowly being destroyed. They are surrounded by aircraft carriers. They are being bombed into submission. All their communications are being jammed or scrambled. Nothing works. 

Except bitcoin. 

Euro-Trash

It’s been a while since we heard directly from Christine. She was back this week talking up one of her old buddies Mark Carney. He has been nominated as one of the top 100 most influential people in the world by Time Magazine.

“A Rock Star central bank governor”? I wonder. A better way to judge success is what is left behind afterwards. Whatever the circumstances of his time at the Bank of England and the Bank of Canada both of those countries' economies are now in far worse states than when he took those roles. Carney complained that Brexit was the cause of many of the issues Britain faces, but he was hugely influential at the time. He did not make the case for ‘Remain’ strongly enough. He lost, and then Britain lost too. To paint his tenure at the bank as success is just plain wrong. 

It’s telling to me that she describes him as the “George Clooney of finance”. I agree. That is exactly what Carney is. Much of his success climbing the ladder of politics and bureaucracy is down to how attractive and charming he is.

In his book “Fooled by Randomness” Nassim Nicholas Taleb describes a policy of choosing the least attractive surgeon possible when selecting a doctor for an important operation. The reason is that person is likely far more skilled, they have got there on talent alone, not charm and good looks. What matters in very important situations is only skill and competence; one should select purely for that. 

Once you see it, you see it everywhere. A reasonable heuristic might be to be suspicious of those in public office or politics who are very attractive because there is very strong evidence to suggest that’s a large part of how they got to where they were. Gavin Newsom of California springs to mind.  

I believe Mark Carney to be wrong about almost everything. He’s a zealot who does not understand the wealth creation mechanism, he left Britain in a terrible state. He could have done better. He will do the same to Canada. But it doesn't matter because he is attractive and charming and people do like being around him and basking in that charm. Consequently, important people like Christine Lagarde are willing to prostitute their own reputations to cement his friendship. 

I found it particularly thrilling for both of them that the piece was sponsored by Rolex too. Brilliant stuff.  

AI Footnotes

As a matter of interest (because I know many of you are using it), I pass this weekly note through AI to check spelling and facts etc. As the AI gets better, it also gets worse. I pasted all its suggestions below, I took two of them, the hard errors. 

The rest though are mostly equivocations. It does not want to take a position, simply to soften everything, not offend. The comments are from GPT 5.4. GPT 4.5 had far more of a personality and was a much better writer. The latest models are like HR staff, spending hours not offending and ‘crafting the message’ to the point that nobody wants to hear it. 

I think I would have hired GPT 4.5 and I would fire GPT 5.4, it’s weak. 

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Zero Day

There is an excellent book on vulnerabilities in software. Known in the industry as zero-days. A zero day vulnerability allows you to operate software at the base layer undetected. They are extremely valuable and generally available only to governments and elite hacking organisations (who also sell them to governments). 

The story is true and documents how the US and Israeli governments strung together zero day vulnerabilities to attack Iran's nuclear processing facilities by compromising the Siemens software used in the nuclear centrifuges. That was in 2010, but zero-days still exist. 

It also documents the business of Chaouki Bekrar, a French national who sells access to anyone in the world's iPhone or Android phone for upwards of $1 million dollars. His business still exists, website here zerodium.com. His Twitter account is still live, one assumes because he is useful to governments as well to others, perhaps less well intentioned. Naturally, he can also be found on LinkedIn.   

This week though life got a bit more interesting for the purveyors and purchasers of zero days. Anthropic’s latest unreleased model known as “Mythos” is so good at coding that it has found hundreds of zero days in all sorts of commercial software, including Linux and iOS. 

Accordingly, Anthropic has announced “Project Glasswing”. They have released the model to Apple, Linux, NVIDIA and others so they can patch the vulnerabilities before the model is released more generally to the public. It found a 27 year old zero day in one of the best open source firewall programs. 

There will be people and governments around the world already exploiting these hacks, their backdoors into systems are probably disappearing as we speak. It is also true that this model is better at coding than any human because we don’t have anyone that has found hundreds of zero-days in a matter of weeks. Each one, when found, sells for millions of dollars.

It’s squeaky-bum time too for the smart-contract industry. Any coding error now will be quickly exposed and exploited. Once this model is released (if it is released), everything will be put to the test. Every piece of code, every platform. Everything. If you have a piece of software that has had every hacker in the world attacking it for 20 years you have a better chance than everyone else. Are we confident in bitcoin? Yes. Are we confident in some smart contract that was coded in the space of two days, not really.   

For those that understand zero-days, this is seriously alarming stuff. For those that don’t, read the book. 

Crypto Legislation

Australia passed its Digital Asset legislation this week in the form of the “Corporations Amendment (Digital Assets Framework) Bill 2026”.

I have no real comment to make on it other than it probably codifies sensible behaviours that are already happening. If you want to spin up a platform that sells digital tokens of some sort to the public, you will need a special licence to do it which you likely won't get. 

I find Australia to be a special case when it comes to licences. You need one for almost anything (fishing, boating, entering an RSL for a glass of beer). Australia loves a licence. A case in point in NSW. To be a painter you need a special licence. You cannot just paint someone's house and get paid. Indeed getting the licence is not trivial either.

If you do get your licence and want to paint something high up, then you need a special certificate of competency to “work safely at heights”. The guidance here is 2 metres or more, which would imply that some tall painters would not be able to reach up with their own arm without requiring special training. 

That is not my specific criticism though, everyone wants people to come home from work safely at the end of the day. It’s that once people attain these licences they can pretty much do whatever they want, common sense can go out of the window. 

“Got your painting licence and your working at heights mate….good to go then”

Nano-Banana: Man painting wall at 400 feet

He’s at 400 feet painting a wall and holding his certificate of working at heights. Big tick. This is compliant behaviour because he has his licence.  

The problem with regulation is not what it protects people from but what it exposes them to. In Australia, self driving cars are banned. One of the most dangerous places in this country is our roads. The regulation permits you to have a glass of wine with your lunch and drive home. So, people do. 

It’s also less fine than self-driving cars which are proven to be 99% safer than a human driving. Insurance premiums for self driving cars in California are much lower than for regular vehicles. Somewhere though, there is a regulator saying no to self-driving because it is safer for their career to take no risk at all, while exposing everyone else to massive risk. The incentives are skewed. 

So it is in the case of this crypto-regulation. A classic example of cowardice really, somebody somewhere has simply codified what already happens while making anything innovative very hard. They covered their own backside and delivered nothing of future value. There has been no attempt to roll out new technology that might benefit people, or even give it a chance to benefit people. Things that might have existed, will not now exist or be developed in Australia. The regulations will be deemed a huge success.

A better characterisation of this argument was provided by Milton Friedman 50 years ago. Yet still we have rooms full of people that are preventing the things that will make our lives better. Particularly in this country. 

Friedman is asked: “Without regulation on drugs, people could die from taking dangerous products. Don’t you find that serious?”

Yes, says Friedman. An unregulated drug can kill people. It’s visible. It’s in the newspapers. It’s a scandal. Everyone sees it.

But what nobody sees is the people who die because a drug that could have saved them was blocked for 10 years by the regulatory process. That death, nobody counts it. Nobody puts it on the front page. Nobody knows their name. Because they died from the absence of something that never existed.

That’s the fundamental asymmetry of regulation.

The regulator has two types of possible errors. Error 1: approving a dangerous drug. Result: public scandal, lawsuits, the regulator loses their job. Error 2: blocking a drug that would have saved lives. Result: nothing. Nobody knows. Nobody protests. The silent deaths have no spokesperson.

As a result, the rational regulator optimizes to avoid Error 1. Always. They add studies. Phases. Committees. Delays. Each additional layer of “safety” protects them, at the expense of the patients who are waiting.

Friedman estimated that the FDA had probably killed more people by delaying good drugs than it had saved by blocking bad ones. It’s impossible to prove precisely. But the logic is airtight.

A concrete example. The beta-blocker Propranolol was available in Europe years before being approved in the United States. During those years, Americans died of heart attacks that could have been prevented. How many? We’ll never know. Because we don’t count the deaths from inaction.

It’s the same principle everywhere. Not just in medicine.

In France, autonomous taxis are blocked by regulation. Every year of delay means road accidents that could have been avoided. But nobody counts those deaths. We only count the first accident with an autonomous taxi, which will make headlines in every newspaper.

AI in medicine is slowed by approval processes that take years. Diagnoses that could be made in seconds by an algorithm wait for validation while patients wait months for an appointment.

Nuclear power has been blocked for decades by fear. How many people died from the pollution of coal plants that ran instead? Nobody counts them.

The pattern is always the same. We see the risk of action. We never see the risk of inaction. And since the risk of inaction is invisible, the regulator always chooses inaction. Because inaction doesn’t produce scandals.

Friedman summed it up in one sentence: “The people saved by the FDA are visible. The people who died because of the FDA’s delays are invisible. And in a democracy, the visible always wins against the invisible.”

The next time someone tells you “we need more regulation to protect people,” ask just one question: how many people die while waiting for regulation to let them live?

The answer is always bigger than we imagine. But nobody calculates it. Because the deaths from inaction have no face.

Red

I was musing on this chart after a very marginally positive month in April for Bitcoin. 

87 green months, 73 red months since launch. 55/45 ish, which compared to stock markets which are closer to 65/35. You would expect that I suppose from newer assets. Apropos of nothing really, I just looked at the chart and didn’t believe it. 

Satoshi Nakamoto

The New York Times published a new “exposé” on the identity of Bitcoin’s creator. It's long and interesting because it contains lots of details about the history of Bitcoin’s creation and release. 

I am suspicious. The article is good if you don’t know much about the search for Satoshi, but nothing in it was new to me. I have seen and read it all before. It isn’t paywalled either. Why? Everything is paywalled at the NYT unless there is an agenda and what could that agenda possibly be? The article even has flashy graphics on a page dedicated to it. 

Adam Back is CEO of the Bitcoin Standard Treasury Company (BSTR). It plans to go public on the Nasdaq through a merger with Cantor Equity Partners (CEPO). The deal has been hanging around for a while but they plan to go public this month. 

Is it possible to imagine a meeting with the investment bank sponsoring the deal that went something like this:

“Guys, we can’t just be another treasury company that holds bitcoin, we have to have something different. What could that different thing be? What about we just get an article out there in the New York Times rehashing old rumours about the CEO being Satoshi. People will love it, who doesn’t want to invest with Satoshi Nakamoto?” 

And, it has worked. It’s all over the news and I am convinced the listing will go ahead as planned.” 

This is an excellent example of Epsilon Theory’s “Why am I reading this now” heuristic.

Incidentally, if Adam Back were Satoshi Nakamoto, would he be spending his time listing a Bitcoin Treasury company on the NASDAQ when he already owns bitcoin worth $100 billion? I don’t think so.

Euro-Trash

You would think a surging Euro would be good news, a sign of success perhaps. I’m afraid not. The return of $1.20/Euro is causing alarm across the former Roman Empire. Chief of the Gauls, Christine Lagarde, said that the soaring exchange rate would be “an element that guided policy”. 

In fact what she means is that the Euro must be weakened, in the same way that the pound must be weakened and for the Americans, a weaker dollar would also be wonderful. Indeed, the whole merry-go-round of currency weakening has been going on forever but is likely to get more intense. It shows up in some places too, like Switzerland, where they are rather proud of their currency and so tend not to print more and more of it. 

Exhibit 1: Australian dollars have roughly halved in value versus the Swiss Franc over 12 years.

The Australia economy itself has outperformed Switzerland over the same period. The huge devaluation is simply down to the amount of Australian dollars in circulation which has increased dramatically. I don’t think anyone in Australia really knows about the growth in AUD supply, or cares. 

Faring slightly better, the Euro, losing about 40% over the same period.  That loss rate is just not high enough though. The ECB needs to print a lot more Euros to keep up with the likes of Australia with its debt funded property boom. They need to lift their game and I’m sure they will. 

As a result, Swiss interest rates remain at zero to try and dissuade too much speculative capital turning up in their accounts. In all likelihood they will turn negative later this year, and the reason is simple. Other countries print near unlimited amounts of currency and dump it on their citizens, who then seek to dump it on the Swiss. In the end there is only so much Australian Wagyu the denizens of Klosters can consume and when they are full, Swiss interest rates will go negative. 

There ought to be national outcry about this level of state sponsored theft but nobody seems to mind. In the same way that 2% inflation is generally accepted as good, for reasons nobody understands. A policy of competitive devaluation is also accepted as good. Yet every country that was super successful had a strong currency at its height. The Pound (100 years ago), the Yen 80s, the Deutschmark 90s, the dollar. But fiat currencies always die. 

It’s a brilliant scam really. All the while the currency weakens, your house price rises, your investments rise. 

The more the currency falls, the richer you get. Right?

Further Information

Our March 2025 report to investors can be found here.

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4Chan

We have talked a bit about the fines levied on American companies by the European Union. Last year, it was their single largest revenue source. How long will America tolerate this?

I think we found out this week from a different source. The UK censorship bureau “Ofcom” decided to fine website 4Chan (an anonymous, largely unmoderated forum) some £450,000 for not complying with UK regulations. 4Chan responded that they only operate in the United States, but they did so rather more colourfully than one might expect. 

Ofcom,

Thanks. As has been explained to your agency, ad nauseam, the United Kingdom lost the American Revolutionary War. We are not in the mood to discuss the matter further, and have not been in the mood for 250 years.

I note for the record that, last time your agency sent my client a censorship fine, we responded with a hamster joke. Since you have now sent my client a giant fine, a fine so large that Mr. Whiskers’ enclosure is not big enough to contain it, we will need to send the fine to Mr. Whiskers’ giant hamster cousin, Nigel J. Whiskerford. Unfortunately, Nigel is out of the country this week, touring in Japan. Here’s a picture of Nigel in Tokyo, dressed up as Godzilla and holding an equally giant peanut.

Isn’t he just the cutest?

My client reserves all rights and waives none. Reserved rights include the right to sue you again and/or to respond to future correspondence with an even larger rodent, such as a marmot.

Or, maybe, you could just stop sending Americans stupid letters and acknowledge the sovereignty of the United States.

Byrne & Storm

It’s aggressive and childish but perhaps meaningful. As time passes, levying fines on overseas companies probably won’t work. Not so much that they are unenforceable but that the American tech companies are larger than most economies. They have real leverage and if push comes to shove and they turn off their systems, it would be disastrous. Indeed the economic damage that they can cause is far larger than most nation states could inflict. 

I do bore on about it but the most powerful entities in the world today are not nations, and this little hamster is a tiny glimpse as to why.

A lot of things are going to exist outside of the purview of the old world. Money and energy spring to mind. Examples of it just keep popping up, why?

Rolling along

A good chart from K33 Research that shows how much bitcoin aged six months or more changed hands in the last year. I’m certain this is the $100k effect we feared. The question is will it happen again next time? By which I mean, $1m per coin. 

It upsets everyone to talk about or think about the ridiculousness of it, but I suspect it will be a similar hurdle.

Should it come to pass, there is another offsetting impact that takes place at the level. The sub unit of a bitcoin, the satoshi becomes worth 1 cent. (1 Bitcoin = 100,000,000). So at that price level, an entire redomination effect will occur, your Bloomberg screen will not say 1BTC = $1m. 

1.15 cents per satoshi in this example. It will make a significant difference to volatility (lower) and liquidity (higher).  

The single biggest thing to happen to bitcoin since its launch will be the Satoshi recharacterisation. Bitcoiners already talk in sats not bitcoin and have done for years.  No protocol change is required for this to happen, simply a shift in market convention. All it needs is the USD to get more plentiful. 

$39 trillion last week…..and barely a whisper. 

Quantum Resistance

The first Testnet of the Quantum-Resistant signatures is live. It is exactly that, a test, but there is significant participation from miners and BIP360 is getting traction which is good. I doubt it is the final solution to this challenge but certainly the logical pathway is clear. 

Bitcoin upgrades are doable but slow. The path to quantum signatures is not without pain and will require people to move their assets, but there is a plan for a threat that may eventuate in the next decade (and it may not). 

Adversarial systems plan for the absolute worst, they have to. I am certain that most businesses in the world do not have a quantum plan and haven’t even thought about it. The ‘yeah but quantum’ brigade is growing in number as far as bitcoin is concerned. 

Bitcoin’s plan is on github. The question is not really for bitcoin but for everyone else. Where is your plan? 

Hostile Regimes

You can learn a lot from a hostile regime. How do people or governments react in certain circumstances? We have no real idea what would happen in Australia if food ran out, or if fuel ran out. There are of course parts of the world where that does happen, and people do know. 

So what happens when your government runs out of money and wants you to stop leaving the country with it? In the West we sort of know. There are a myriad of exit taxes that make leaving expensive, everything becomes an instant capital gain and sometimes there is a legacy extraterritorial reach of taxation for a number of years after you leave. 

When it comes to gold we also know. The Americans have banned gold holdings in the past, the Russians are now banning gold export of more than 100g. Considering the jewellery on some of their overseas tourists that will be quite a challenge to enforce. 

Gold has a history of being seized, in many different types of circumstances. It just cannot withstand hostile regimes. 

Euro-Trash

Specifically though, it wasn’t the EU. It was the EU President Ursula von der Leyen. Celebrating the trade deal with Australia she decided to ruin it by making veiled threats about the security of her new trade partner. 

I would say there is a time and a place. In my case, I don’t go out for dinner with someone, have an enjoyable evening, and then casually remind them that they might get run over on the way home.

Ursula emphasised her point, telling Australians that they “cannot rely on a single supplier for critical minerals”. That’s the point of the deal Ursula, we are the single supplier. You don’t have anything but windmills. Australia has basically everything, and then some more too. It’s just that most of the time we can’t be bothered to look for it. What’s more, Australia produces enough food to feed 80 million people. Which perhaps also explains why 32% of us are obese. 

This is Anna Creek Station, one of the largest cattle farms in the country. 2.4 million hectares, compared to Europe’s largest, 57,000 hectares. In Anna Creek they call 57,000 hectares the back garden. 

It is 1,000 km from Adelaide, 2,000 km from Sydney and 2,300 km south of Darwin. Anna Creek, if you can find it, has more cattle than Greece and Bulgaria combined. From the perspective of cattle farming the deal sounded good but actually equates to about 0.1% of the cattle in Australia being available for European export. It will make little difference to Australian farmers who are still unable to seriously export to Europe. Selfishly, I'm glad because Australian beef is a lot better. I find the European version still tastes of Chernobyl. You know, because distance did save Australia that time.  

There was a defence deal too. Australia and the EU will now conduct naval collaboration but the EU has no ships at all. It's a trade agreement, a piece of paper and Australia has only 10 combat vessels. Everything else is a surf board. So, I shouldn’t think that will amount to much but it was a nice thing to be able to say to our visiting guest. 

On balance, it was a good deal for Europe and an ok deal for Australia. I hope Ursula has a safe trip home because planes crash all the time in an uncertain world. Thank you for visiting.

Further Information

Our February 2025 report to investors can be found here.

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Bitcoin

A whole week of positive ETF inflows last week. The S&P 500 fell 2.2%, and gold dropped 3% and bitcoin gained over 10% as the crypto market added over US$200B. Why? As with all markets, we don’t really know. But the following ideas are true and may well be contributing. 

• Wars are expensive. Generationally expensive, amplifying debt and adding to inflation. Bond yields everywhere rose sharply last week as markets priced in more of both. 

• You can’t blow up Bitcoin. It sounds flippant but it is not intended to be. Distributed systems are far more resilient to war, than other assets. Lots of asset classes have single points of failure. Airlines with their susceptibility to oil prices are a good example, airports are an even better one. Entire continents could fall into the sea and bitcoin would keep going. 

• The general vulnerability of the economy to any sort of disruption is being laid bare in Iran and it begs the question, how resilient is your system?

Now the boring bit. The bit everyone hates when I talk about the Sovereign Individual (again). In that book they accurately predicted that wars would become incredibly expensive to prosecute as time went on, because the cost to smaller nations of doing enormous damage to larger ones would fall significantly. The concept was described as the “falling returns to violence”. Essentially, it costs very little now to cause great economic damage as the $10,000 drones hitting Dubai airport prove. Even worse, they are being shot down by $400,000 anti-drone missiles. It is a huge cost asymmetry. 

It’s such a big issue in fact that the US Navy has its lead aircraft carriers (very sensibly) a long way back from the battle zone because they are so easy to attack with cheap weapons. The Houthis aren’t exactly renowned for their technological capability and yet can somehow threaten a vessel that carries more firepower than every nation on earth save for its host. 

Save yourself the trouble of reading the book. This summary is good. The book improves with age, written in 1997 its predictions are becoming increasingly spooky.

“The biggest opportunities come from new niches created by exponential tech shifts and others’ failure to adapt.”

1000 years of history dies

So says the Electoral Reform Society. The United Kingdom’s Parliamentary system is a little odd in that until 1992 there were 600 members of the House of Lords who held hereditary peerages. Simply unelected barons who would lob up at the gates of parliament and be let in by dint of birthright. 

84 hereditary peers remained until this week when they were voted out of existence. It must be said that most people are not sad about this at all. It's difficult to justify. Even so, if something survives a very long time in a hostile environment, it's probably quite a good idea. 

The oldest of this week's abolished peerages belongs to the Earl of Arundel. The family has held a continuous position in the House of Lords since 1184. They still live here, in Arundel Castle. 

They also held the position of Earl Marshal meaning they oversaw the State Opening of Parliament as well as Royal Weddings and Funerals. No longer, the role will now be fulfilled by Brian, from Accrington. 

What arguments are there for why this could be a good system? Well perhaps the only one I can advance is this: their legacy is inherited by their children. So they work quite hard to protect it and do the right thing. If such a thing exists they are ‘dynastically committed’. Also, because of the hereditary nature of the peerage, the children can’t really avoid what's coming their way either. So everyone needs to behave with reasonably good intentions. That does not always happen, but it is a good counterpoint to the alternative which is an entirely elected upper house who behave like tomorrow does not exist. 

A case in point, Nancy Pelosi of the United States House of Representatives, a lifetime politician earning $200k, is somehow worth $400 million. I accept that she is an excellent stock picker but she has made Warren Buffett look like an amateur and she's not alone. There is disproportionate success in the US Senate too that defies probability. I’m not against their success, I just cannot explain it. 

The fact is that the hereditary peerage is designed to avoid corruption. The consequence of misbehavior cascades through multiple generations. As a result, they broadly did behave and did not interfere with the work of the government if they did not have to.  

It’s indefensible really but somehow it worked, and now it’s gone. It is possible that the system was cleverer than we thought it was and we will only find out once it is no longer there. It won't take 1000 years to find out either. 

Slowly then, the nation state decays. It dismantles its infrastructure and consumes itself through spending. 

Yields

The UK has been hit hard in terms of borrowing costs since the commencement of action in Iran. Rather surprising because they have been very reluctant to help out their closest ally. There is more to it and perhaps it’s because the natural response in the UK to any incident is to give away more money. 

Barely a rounding difference £53m, 80 pence per resident. But the point is the spending continues and never seems to stop. In the last financial year the UK’s budget deficit was a massive 5.2% of GDP. The UK’s thirteenth largest since 1948. Annual borrowing is now around £2,200 per head of the UK’s population (or more importantly, £4,500 per private sector worker).

The situation was slightly less bleak in America where at least strong economic growth gives them a fighting chance but even then the bond market is not happy. 

We have been promised a bond market reckoning forever. It will never come though. We know that from Japan. It can always be resolved by the magic money printer, and it always will be. 

Total interest cost in the UK now £120 billion annually. Twice what is spent on defence and the equivalent of the entire education budget, and rising. 

As we stand the Bank of England holds 8% of all outstanding gilts from its QE program. Quite soon, that number will begin to rise again. 

Private credit

Is there another kind? Turns out that any lending not from a commercial bank is considered ‘private credit’. It's a very dark descriptor that I imagine was invented by the banks themselves to draw a shadow over markets in which they couldn’t, or wouldn’t, participate. Now private credit is big, and the question is, is it too big to fail?

March 16 (Reuters) - Private-credit market jitters have spilled onto Wall Street, with some major U.S. banks tightening lending while the funds have capped withdrawals as mounting concerns prompt firms to curb risk and brace for further strain.

Sentiment had been dented by concerns over valuations and transparency, as well as cases such as the bankruptcy of auto-parts supplier First Brands and car dealership Tricolor, where some private-credit lenders held exposure.

There seems to be tremendous drama in private credit because there are no strict requirements for funds to mark their investments to market. So if they lend $100 to something wobbly, it’s worth $100 until the day it’s worth zero.

We discussed this the other week in the context of commercial property. Most assets don’t actually need to find a price until they really, really need to find one. When that happens the price isn’t the price you thought it was. As a consequence, some private credit funds have restricted withdrawals because their assets can’t be sold, ‘temporarily’, of course.

For us, we suffer every downturn because bitcoin and ethereum and the rest have such visible pricing. Everyone knows exactly the price at all times: 

“I see that bitcoin is down blah per cent”. 

“Yes, you are exactly correct, to within cents. May I inquire as to the specific performance of your private credit investments?”

Bitcoin has more trading hours under its belt now than the NASDAQ itself. It's exhausting. Sometimes I just want a day off. 365 days 24 hours for all of those days always knowing the price. 

We always, always know the price. 

So much of the investment world is not like that because the price is probably some fraction of what the books say, but the rules are ok with that. For now. 

Euro-Trash

As markets go digital? Surely they have been digital for 30 years or more. Payments in Europe using the SEPA system are already instant, you pay anyone in any Euro country via SEPA (which is free) and they receive their money instantly. What then is the Digital Euro for? Quite honestly I do not understand it but the ECB is pushing their Digital Euro Project really hard. 

The arguments here were made in a podcast by Piero Cipollene, an ECB Board Member.  

We’re back on the whole ‘Blockchain’ thing again. Blockchain good, bitcoin bad etc. Fundamentally, at its core it completely misunderstands the technology.  Blockchains are intentionally designed to be slow. The reason is so the person in Peru and the one in Mongolia can download data within the same fixed window and have a reference point that they can both agree on. Bitcoin arbitrarily chose 10 minute windows for that purpose. It’s slow because it controls for slower bandwidth and geography because everyone has to host the software. 

You would never run a ‘blockchain’ if you were the only person that could write to it, which is exactly what the ECB proposes. It just does not make any sense. They should use an Oracle database like every other big player in the world does. 

The whole thing is a mad salad of nonsense verbiage. 

The full roadmap can be found here. I wish you the very best of luck if you choose to read it. All I took from it was this: 

“With Appia, the Eurosystem aims to deliver a blueprint for a future long-term solution by 2028, in cooperation with both public sector and market stakeholders”

What?

Two years to come up with just a blueprint  for a future long-term solution.

Further Information

Our February 2025 report to investors can be found here.

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Making Tax Miserable

To great fanfare the UK Government is about to embark on its ‘Making Tax Digital’ program. The idea is to modernise tax collection and reporting by mandating that taxpayers keep digital records and submit returns on specifically approved software. 

Large companies already do so but MTD makes this mandatory for every landlord, sole trader or self employed person in the UK. There was some helpful advice for them too on the HMRC website about how they could ‘connect their APIs’.

This guidance explains how you can integrate your software with our APIs. It provides examples of how they fit into various end-to-end user journeys to enable individuals and their agents, where authorised, to meet their obligations after they have signed up to Making Tax Digital (MTD).

Incidentally, ‘signing up’ to MTD is mandatory. So “are enlisted” would have been better. 

It's rather more than finding software though and “connecting your APIs”. Taxpayers now need to submit five tax returns a year instead of one. Quarterly updates on your income and expenses, then a final tax return confirming you really meant what you have already told them. This is already required for VAT registrants which are an entirely different set of obligations. Again, large businesses do it already, but for everyone else (so 90% of businesses in the country) this is a new and as yet undiscovered nightmare. 

Anyway, the net effect has been rather less than positive; here is Spectator columnist Lionel Shriver. 

Most people will not be able to achieve this administration burden without professional help but there are nowhere near enough accountants to do this work in the UK. What’s more, if you do find help, at a minimum it will be £1,500 just for them to say hello and in the simplest cases you might get your five returns done by an accountant for £2,500. 

The lower threshold of catchment here though is £50,000, which is clipped already by the government at 45%. They are suggesting now that everyone must contribute another 10% of their net income just to file a load of tax returns that HMRC doesn’t need and never previously required. What’s more it is not even intended to raise more money. 

Now people are leaving, not really the country, but certainly the workforce. A slew of early retirements are incoming from contractors who simply cannot be bothered. 

UK government expenditure is now 45% of GDP and rising, but really the number is false. It does not include the time spent by the private sector attending to government mandated admin which surely now exceeds 10% of all the time at work. In this case all the extra work will add nothing and probably less than nothing. One can only imagine the feast of money that consultants have had designing this nightmare and the software that goes with it. 

Oil

Everyone was excited. “Oil is $120”. 

The peak nominal price for oil was in 2008 when the price reached $147. Nothing much had happened other than a Goldman Sachs analyst, Arjun Murti, publishing his ‘super-spiker’ paper suggesting oil would reach $200 by 2010. He was, naturally, spectacularly mega-wrong. But nobody seemed to mind and he retired as a partner in 2014, sailing into the sunset on a yacht full of $40 oil. 

Herewith then, oil priced in my beloved metric, dozens of eggs. Why eggs? Because the cost of production stays the same, we don’t get better (not that much anyway) at making eggs so the cost base stays consistent. It bounced around in covid and bird flu but ultimately hens lay eggs at the speed they lay eggs, you can't give them GPT and have it happen any quicker. 

A barrel of oil today is about 25 dozen eggs, pretty much exactly on the long term average. The trend though, is downward. Since the super-spike of 2008 the oil price has consistently fallen as American production has ramped up. The USA now completely dominates world oil production, a fact that surprises most people. That fall in price was against a very stiff cost trend against fossil fuels, which itself is now reversing.

The only OPEC country in the top 5 is Saudi Arabia, making OPEC a footnote in oil history.

Then add Venezuela, much of their oil didn’t hit global markets. If America gets organised, production there could ramp up significantly. Iran itself represents only ~5% of global oil production so the disruption there is unlikely to have much effect but if things fell in a nice way (unlikely), then there might be slightly friendly Iranian oil hitting the global market in 2026. Small chance, but not no chance. 

More broadly though, we are getting better at extracting oil all the time. The West is also waking up to energy demands and even countries like the UK will restart North Sea drilling and fracking, perhaps not in the next three years but certainly in the next ten. 

Incidentally, if you were to say to people that you measure the performance of your investments in dozens of eggs you would be considered mad. People openly laugh at the suggestion as stupid. Yet it is a provably superior measure than nominal measurement. 

That is the fiat currency story, a tremendous intellectual success. People think oil prices are near recorded highs, but it’s not even close. The deeply embedded measurement system that is so successful, so omnipresent, nobody cares to think about it. 

The measurement basis explained

Not stable

During downturns you can broadly predict who will be influential when the mood finally shifts. Who is building when the chips are down? Which parts of the industry are looking several years ahead, longer.

We are now at the all time high of stablecoin issuance. $314 billion. Perhaps more interestingly the once dominant Tether ($183bn) hasn’t moved much in months and all the growth is coming from the US based businesses most notably Circle, with its USDC. 

And so what? Well the so what is simply that once money enters the crypto system it rarely leaves. The growth is real and people with USDC and USDt will trade bitcoin and other tokens but rarely do they go back to fiat. So it is meaningful for the future.

More than that the current growth is underpinned by a new regulatory environment in the US. Banks can custody these assets, you can borrow against them. The full suite of products that we enjoy in the fiat system is quietly being built out around a new set infrastructure. But again, so what? Well every stable coin is 100% backed (or more) by treasuries or equivalents. Every fiat coin is on average 7% backed by liquidity, the rest balances stand on the head of a needle. That needle being house prices, commercial property and commercial loans. Commercial bank balance sheets basically. 

The default view is that the creditworthiness of a USD far exceeds that of USDC, where on closer examination I would argue the reverse is true. If the banking sky falls in, or house prices fall 50% I’d rather be in Tether than a commercial bank. 

BlackRock even has a fund for USDC holders where they can invest with their stablecoin and earn income. 

It’s not as though there is anything special about this fund either, it yields about 2.5%. It's simply that the acceptance of this technology is here. It is growing very quickly and very quietly. 

So much so that the World Economic Forum, who for so long hated this sector, published an article explaining what it is all about. Incidentally, their change of direction was rather obvious back in January when the gang were in Davos doing God’s work. 

Euro-Trash

Nuclear? Surely not. Just years after Germany turned off the engine of its industrial base, Ursula is back telling us all how wonderful nuclear power is. It’s available around the clock! 

A short tour of recent history will show her voting for the complete phase out of nuclear energy in the Bundestag archives. Yet now she is touring Europe spruiking the quality of Europe’s nuclear engineers, many of whom have lost their jobs as a result of her earlier vote. 

In her speech this week: “we have far more nuclear engineers than the US and China”. China has 60 nuclear reactors and is building another 40. Maybe Europe has more engineers, but what are they actually building? The reality is they were fired over the last decade and have probably retired. 

You would never get away with this in the private sector. A monumental, ideologically driven, wealth destroying, catastrophic decision. The nuclear chart maps almost directly to the success of the German economy. Absolutely industrially dominant at the turn of the century and for the decade that followed, then steep decline. 

Further Information

Our February 2025 report to investors can be found here.

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ETF Flows 

A little heartbeat on the ETF flows here from Coinglass. Suffice to say until this week, recent outflows have been negative, but not overwhelming so. The net decline in ETF bitcoin holdings is tiny overall from its peak and does little to explain the price movement. The main factor is older holders selling. We did preface this at $100k that it was likely to be a very significant hurdle because of the ‘OG’ selling that it might (and did) precipitate. 

Surely though, that is bad? 

No. What we want is maximum distributed exposure. As many people as possible with some exposure to bitcoin. Directly, through ETFs or funds like ours or through some other means. Bitcoin’s success is directly attributable to early adopters distributing their coins. 

Like the now famous “Laszlo Pizza” of 2010, where he paid 10,000 bitcoin for two pizzas. It looks ridiculous in retrospect but he was actually making it real by distributing his stack to others in return for something.

Let the bitcoin flow, I say. Here they are flowing as I write, 27 blocks deep of transactions in the queue. 

The user of last resort

I read a thesis last week that AI’s hunger for power would ‘kill bitcoin mining’. Specifically, the idea is that it is far more profitable to sell power to cashed-up AI providers than it is to do so to bitcoin miners. A case in point would be Bitcoin miner Iris, whose premium power contracts have indeed been pivoted to AI data centres with great success. 

The idea fundamentally misunderstands mining though. Since the beginning bitcoin mining could only ever occur in places where nobody else wanted to be. 

1. So we began with home miners. You used a simple desktop PC in 2009 to mine bitcoin. Nobody wanted the excess capacity on your computer and that was that. At that time there was no competition for that space, people mined bitcoin. 

2. Later, ASIC miners specific to bitcoin were invented. They needed power and so the big miners went to places like Kazakhstan and Mongolia where power was plentiful and cheap. At that time there was no competition for that space or that power, people mined bitcoin. 

3. Bitcoin expanded to geographically stranded energy, parking miners on gas flares. No competition for that stranded energy. 

4. The space evolved. Miners started to sign up very cheap power contracts wherever they could. There is excess capacity all over the world for large periods of the day because the renewable build out often produces more than is required. Again, there is no competition for that particular space and….people mine bitcoin. 

Now we are here. Demand for power 24/7 is soaring because of AI and so power grids particularly across the US and China are being built out heavily to accommodate it. Nuclear reactors are coming back from mothballing. It will take 3-5 years but power availability (at least globally) is going to soar. The thing is you have to build power to peak capacity so your grid needs to produce for the very hottest (air con) or coldest (heating) day; which will also be days when everyone is indoors asking ChatGPT why they are fat and depressed. 

There will be so much excess energy for large parts of the day that the demand for an intermittent user; specifically the one who can just turn off whatever they are doing at a moment's notice is going to soar. This has been put to the test in Texas, a hub for bitcoin miners, who sign up to intermittent agreements and turn off their equipment on very hot days when electricity demand soars. It’s still rare, their uptime remains in excess of 97.5% annually. The key feature is that turning it off doesn’t matter, there is no time dependency to bitcoin mining. Mining at 1am is the same as mining at 6pm on a very hot day. For the vast majority of other grid users there is no choice. Supermarket freezers must stay on, the kids are hungry, the oven must go on etc.

Bitcoin has never used power that other people wanted. It can only afford power that nobody wants. It was true on day one and it is true today. 

The thing is, the availability of power that nobody wants is about to go through the roof. You will not want to be running a massive AI data centre without also hosting a bitcoin miner to make sure that you always use 100% of your allocated power contract. 

Bitcoin mining has always been the user of last resort. 

Hard things

I’m impressed by this. It is extraordinarily difficult to get a Federal Reserve master account. Much in the same way as getting a banking licence in Australia is incredibly hard (keeping it is even harder). The same hurdles are true in the USA. Kraken went through five years of pain:

“The approval follows more than five years of sustained regulatory engagement, extensive examination, and operational scrutiny. As a Wyoming-chartered Special Purpose Depository Institution (SPDI), Kraken Financial is a state-regulated bank operating on a full-reserve basis, holding liquid assets equal to or exceeding 100% of client fiat deposits.”

A master account is essentially a bank account with the person that prints the money. Your money in the CBA is just a line on a spreadsheet. If CBA collapses the money goes with it save for the guaranteed amount ($250,000 per account). That cannot happen in a master account, it is the money. That is why they are hard to get and the Fed and the RBA are extremely protective of who joins the club.

The least popular member of this club is going to be Kraken because their business model threatens everything in banking. 

“Over time, this architecture could enable atomic settlement between fiat and crypto, institutional-grade cash management integrated with digital asset custody, and programmable financial products built within a fully regulated framework. This is what it looks like when crypto infrastructure matures into core financial infrastructure.” 

So we are talking stable coins paying yield to holders. We are talking about bitcoin backed loans at a fiat based institution.

Most impressive is the depth of the lobbying effort that went into stopping this from happening. You will recall Operation Choke Point II under the Biden Administration where crypto providers were de-banked at the behest of the incumbent providers. That is to say banned from having any bank account at all, never mind a Fed Master Account. 

It took five years to get this far and it might take five years more for interesting things to happen. The climb is unstoppable though. I note also that Kraken Bank is in excess of 100% reserved. Considering the levels held by their competitors it is just about the most robust bank in the world financially. 

Huge effort. Not trivial for the industry and congratulations to Kraken. 

Bricking it

Two things strike me about house prices in London. First, they have had a terrible time. Second, nobody that actually lives in London believes prices are down.

Progress has been ‘slow’ but they have risen every year. Nominally true. Real prices of course are down about 25% from their peak. Several things happened, a severe bout of post covid inflation and then a collapse in the really high end market because the new government chased away all the rich people in London. That high end collapse drags the average down but it also trickles down generally because less money is sloshing around.

No millionaire in their right mind now would shell out £15m or more for a house in London right now. 

The reason is one simply of taxation, not just generally but even on the house itself. If you buy a second home in London now for £2.5m, it costs £340k in stamp duty. If you did buy one for £15m, the stamp duty cost is £2.46m because you pay the additional 5% on the whole thing because it is a second home. 

I’m certain nobody is actually doing this, you’d have to be mad but that is the nature of the change in the rules. The basic stamp duty rates are here, and the additional property rates are here. There are now lots of beautiful houses in London that nobody wants, even more homeless people and even less tax raised for the government.

Yet, the prospect of this creeping into Australia is high. The problem is when so much wealth gets trapped in one source the government has no choice. It happened in the UK. There was nothing surer than London property, just like there is nothing surer than Australian property today. It’s a sitting duck though. We will find out how much of one on 12th May this year. 

Euro-Trash

It was Saturday morning in Europe when war broke out in the Middle East. By late afternoon that day the major airports across the region had closed causing massive disruption to the 500,000 people that pass through them every day. A lot of Europeans were ‘trapped’ in the UAE in particular. 

Enter Ursula von der Leyen. 

On Monday! It was all and everything that could be said about the European Union in one message. 

When Monday came not much happened but by Tuesday Ursula had been on the phone. 

To Bahrain:

To Qatar:

To Jordan:

The EU is a piece of paper. It literally has nothing. No army, no money, no tax raising power. Nothing makes it more obvious than the last seven days. There is nothing wrong with trade blocs, but there is something odd when they pretend to be something else.

Further Information

Our February 2025 report to investors can be found here.

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One article

I worked for a menial's hire,

Only to learn, dismayed,

That any wage I had asked of Life,

Life would have willingly paid.

This article caused ructions across the globe this week. Over 300 million views. It was a rather doomsday scenario about what is happening with the continuing acceleration of general intelligence. There were lots of targets for doom. One of them, perhaps the one causing the most financial impact, was the credit card interchange fee, which has always been a rip off. The thesis was 

“AI Agents will eventually transact on Stablecoin payment rails and bypass interchange”

It caused significant declines in some major financial players, because the AI robots are going to choose digital money and refuse to pay interchange. Of course they are. 

Most of us do not understand or care about the interchange fee. If you buy something for $5, you pay $5. It is the merchant that bears the interchange, an invisible racketeering layer between the banks and the card companies. It is deliberately opaque and a constant target for regulators. Who can be bothered though to change the payment rail anyway for such a small amount? The answer is AI. Nothing is boring for AI. If it is handling your payments, it isn’t going to want to pay interchange, which it does understand, so the ultimate outcome will be you pay less. 

There was more drama in the article too about white collar job losses, the doom loop of lower spending capacity and financial collapse etc. Maybe. Technology though has never made us poorer, ever. It certainly reallocates though, horse cart manufacturers stopped doing as well as Henry Ford but overall things got better. 

If the technological acceleration means the price of things falls from $100 to $90 but my income falls from $200 to $150 then it is very bad for me. But your $50 decline went somewhere, someone is shelling out less and keeping the $50.

That’s the game then, overall wealth up but pretty surely not evenly distributed. 

You could ask your ClawdBot agent what it thinks you should do, over time it will get to know you well. If you don’t know what I’m talking about then it might be a good moment to watch this video and have a go at installing one. Be very careful. Build something very simple and do not install it on your main computer. 

If you are depressed by the first article. Refresh yourself with this much more positive view. Abundant intelligence, up and to the right. All you have to do is engage, and actually it requires what I would call “enjoyable effort”. All you need to do is ask for what you want. Then your agents build it for you and you sit back in awe. 

Across the world, almost nobody is doing it. Completely blank canvas. 

It is entirely true now to say that by next week you could have the equivalent of 20,000 people working for you. It would be a significant technical effort, but it can be done and one red dot represents the number of people having a go. 

In the reallocation of economic gains, where do you think they are going to go? 

Getting windy

In the UK between 2009 and 2024, installed generating capacity increased by 20.7%, yet electricity output fell by 24.2%. Every growing economy grows power production. There is no other way.  

It is a significant drop in the efficiency of the UK’s power network. It closely tracks the relative decline of the UK’s GDP versus the rest of the world. In fairness to the politicians that delivered it, the UK did vote for this and a lot of people consider it a significant success story. 

You can map the wealth of nations though from TWh/Capita straight to GDP. The UK was a 6 TWh/person economy, now it is 4.6 TWh/person (and dropping). 

China is at 5.1 TWh/person economy (and rising). Japan, 8.15 TWh/person. The US is a whopping 12 TWh/person (and starting to rise again). It actually feels about right. 

Incidentally, the bitcoin network consumes 200TWh annually, two thirds of the UK consumption and growing.  

The power is the money. Everything else is a story.

Commercial Property

I wonder about the continued renaissance of commercial property. In particular, I often see articles in the Financial Review spruiking a ‘comeback’. The 33rd comeback since Covid. The articles are written by experts of course and I know very little about commercial RE, I’m sure lots of the sector is doing really well. Data centres in particular.

A case in point. SalesForce Tower Sydney. 99% occupancy. But honestly, look at the view. It must be one of the greatest views in the world, if not the greatest. Of course that office is full. It will be full right up until someone builds in front of it in 30 years. But really, is that indicative of the wider market?

300 metres away, a commercial office has been dormant for five years. Across the corridor from us a 70 seat office has been empty for a year. The ‘return to office’ mantra is very real except that people don’t want it. It’s a meaningless sample size but the length of the dormancies near us is shocking. Sure, everyone wants the showcase office on the top floor to impress clients, but two blocks away the story is different. 

The battle for “come into the office” is lost. Employers just outright lost that one. People actively select roles that allow flexibility, they will accept significantly less money for flexibility too because going to the office isn’t free. I guess $50/day at least in time and extras. 

Commercial property needs to drop 20% just to accommodate one day a week at home (it has). Now it’s under pressure because of artificial intelligence. Claude Code does not need a chair, so surely more pressure?

One of the reasons I think that so much positivity surrounds the industry is the presence of the big Super Funds. Some 20% of office space in Australia is owned by them. It suits nobody if these funds do not perform well, everyone in Australia is invested in CRE going well either directly or indirectly.

It seems to me an asset that is hard to price. Your mates at Lunch & Lunch Valuations pop in every three years and off we go. It doesn’t have to engage with the day-to-day variability of price visibility. As a consequence, how robust is it? 

There is something to be said for having an active market price trading 24/7 365 days a year. It doesn’t do much for weekend relaxation but it is absolutely robust and the more you survive in that market, the more you survive. 

Great views from the top floor will draw yield forever, but when the cold winds really blow on CRE, will it find a price?

Wrong again

Last week I confidently predicted that nobody would admit to sacking people because of AI. “Nobody would dare”.

Enter Richard White of WiseTech this week, whose CEO proudly proclaimed that 2,000 people would be sacked because “the era of manually writing code is over”.

The Commonwealth Bank was more measured. After last year's debacle where they were going to sack 45 people because of AI and didn't. They have spent $90 million on a new site to help employees ‘transition’. The goal is “transparency and opportunity”, prior to near certain death. In 2025, you were getting sacked. In 2026, there is a website to help explain exactly why you will be sacked in 2027. On balance, I suppose it is better. 

Anyway, it was coming. Now it is here and I was wrong about people not saying so. Now that somebody has, there might be more confidence from others to do the same. 

That is to say, actually tell the truth. 

Euro-Trash

As we have covered before, to pay someone €60,000 in France costs €95,000. There are all manner of on-costs and employer taxes that make up the amount and overall, if you have a job in France it is an excellent outcome. In fact, the ideal job in France is to work for the government in a senior role, but not so senior that you might be the victim of political fall-out. “Invisibly senior”, is where you need to be. Deputy under-director of regional procurement is what you should be aiming for.  

The problem with the arrangement though is you get this. The official European statistics on new businesses versus bankruptcies in Europe. A net loss of about 80,000 businesses a year. Which nearly fully explains why the French state is 60% of the economy and why every economy in Europe has an exploding public sector. 

There is a pretty clear trend across most of Europe to bigger government, which is perhaps why the German Finance Minister stepped up this week to rule-out joint Euro-Bonds.

“As German finance minister, I will always stand for stability,”  Klingbeil acknowledged that the debate around Eurobonds is evolving and pointed to the more “nuanced” comments recently made by Deutsche Bank CEO Christian Sewing and Bundesbank President Joachim Nagel. Notably, Nagel has softened the Bundesbank’s traditional opposition to joint EU debt. Nevertheless, Klingbeil stressed that “the position of the federal government remains unchanged,” arguing that there is currently no need to shift course as sufficient EU funds are available. The remarks highlight a clear divergence between the Federal Ministry of Finance and the Bundesbank in this increasingly important debate. 

Well, guess what? Herr Nagel is not getting the ECB President's job if he says he is opposed to joint Euro-Bonds. So he pretty much has to say he isn’t. Helpfully, the Finance Minister has no such pressures and can simply rule them out. 

These are not trivial off the cuff remarks. The Germans want Nagel in the ECB chair. Whatever he needs to say to get there, he will say. If he gets there, I bet a Deutsche Mark he has a subtle shift of position.

The French are bankrupt. The Germans are not. All to play for as regards Christine Lagarde’s hot seat.

Further Information

Our January 2025 report to investors can be found here.

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Dutch

Until now Dutch taxpayers have been levied taxes on ‘assumed gains’. Say you have $1,000, you might earn interest of $100 but the law might decide your assumed gain was $300 and on that amount you would have paid tax. The idea was to tax the appropriate income from assets, not the gains themselves. It sort of worked until falling interest rates caused large disparities between what people were actually earning and the tax they were being charged.

It sounds crazy, so crazy in fact that the Dutch Supreme Court ruled it illegal.

The new “fairer” Box 3 tax was approved by the lower house of the Dutch parliament on Friday. It will be based on actual gains but as drafted extends to capital gains. So, as it stands, at every year end the Dutch will be taxed not only on their income but also their paper gains.

This is all still to be approved by the Senate and then to be implemented by the government. The headline is “Dutch impose 38% unrealised gains tax”. Likely that will not actually happen because it will be massively watered down in implementation.

It’s beside the point though. Unrealised gains discussions are live across the world. We’ve had it in Australia. We have it in California where a one-off wealth tax of 5% on billionaires has been proposed. Norway did it too (and tax revenue dropped sharply). 

In California, it seems unlikely that this will take effect, but it has been sufficient for Peter Thiel, Mark Zuckerberg and plenty of others to leave the state and set up bases elsewhere in the US. As in, even before it became law, it is a complete disaster because of the clear intent it signals. The lack of general pushback also suggests that the general population doesn’t care. Why would they? 

The issue seems to be that real incomes are falling everywhere. The whole concept of personal income taxes as a meaningful share of government income is going to change. The Australian government forecasts income taxes rising to 55% of total receipts by 2033. That seems very unlikely, not just here but across the world. 

The money will have to come from somewhere. Wealth taxes seem like a shocking theft today, but gradually they will be normalised. California and Holland’s proposals seem unlikely to succeed but they already worked. We talked about them, we were outraged and next time we will be slightly less outraged, and again, and again and then they will be here. We will ask, how did that happen? This is how. 

Quantum (again)

We covered the quantum challenge late last year in ‘The Quantum Problem’. In essence, a quantum computer can factorize large numbers in a way a classical computer cannot. Accordingly, a quantum computer could (at least in theory) break Bitcoin’s encryption. This is a much more general issue than bitcoin, governments worldwide are aiming to move to quantum proof  algorithms in the early part of the next decade. They will all do so under the cover of darkness. Bitcoin will have to walk the path in public.  

Enter BIP360 which is the first step in quantum proofing bitcoin. This has now progressed to the formal proposal stage meaning it will be considered for inclusion in the source code. In essence, it hides public keys until the moment bitcoin is spent. When coins enter the mempool waiting to be confirmed there is still what is known as “short exposure”, so the coins would be exposed at that point to a double spend attack if a quantum computer were to direct its power at the transaction. Bear in mind it would take billions of years for a classical computer to do it and something like 30 minutes to 8 hours for a quantum computer of sufficient size (which does not currently exist). Given block times of 10 minutes it is still very unlikely to succeed. Still, the change needs to be made. 

The next step then is to replace the signature scheme of bitcoin with a post quantum scheme. That would address the short attack window while transactions are in the mempool. It also comes at a cost though because Post-Quantum signatures are large. 4 KB v 64 bytes for the current signatures. This has consequences for transaction throughput etc. because blocks would fill more quickly with quantum proof signatures. 

This will get more and more air time and it should. This is a much more general issue though, if a large quantum computer arrives, you will not be worrying about bitcoin, I assure you. 

UK

17% unemployment then for men under 24. In fact the number not actually working is much higher of course because many are in education and training at that point. One quarter of under 24s do not work. Fine if you are doing a PhD in Rocket Science as the government claims everyone is, but there is no evidence of it from Britain's rocket launch count (zero). 

It has been much worse, in 2011 post financial crisis, but it is surging now at a rate not seen before. 

Early last year we covered that the government response in Australia to the creep of artificial intelligence would be exactly the wrong one. Specifically, legislation would be introduced to ‘protect’ workers and in so doing would have exactly the opposite effect. That is pretty much what has happened in the UK. The Employment Rights Act which became law late last year offers the following benefits:

• Paternity and unpaid parental leave from day 1

• Bereavement leave from day 1 - 24 weeks (unpaid)

• Day one right to flexible working

• Sexual harassment; employer must take ALL reasonable steps to prevent it

• Large employers must have plans for supporting menopausal persons

• No waiting limit for statutory sick pay

• Unfair dismissal window reduced from two years to six months

• Repeal of trade union restrictions under earlier governments

Taken individually, and considering the stories that would have given rise to the change you could probably accept all of them. Along the lines of “we are a modern and fair society, so this is all reasonable”. It is fine of course, unless you are the employer. It’s a lot of risk “all steps to prevent sexual harassment”? Like what? How could one possibly achieve that save housing the opposite sexes in different parts of the building which itself would bring a discrimination lawsuit. It is impossible really for the employer to win here if an exploitative employee wants to make life very difficult.

The natural response then is we need to be extremely careful who we employ. Better yet, let's not employ anyone at all. The only institutions which seem geared up to handle this level of admin are governments themselves who both in the UK and Australia are the primary engines of employment growth. How could they not be? 

This chart is from Britain’s Office of National Statistics. It shows regular real pay and CPI. In essence real wages have gone nowhere in the UK for twenty years. If you use RPI (which includes housing cost) it's even worse. What’s more you would have to actually believe in the CPI and the RPI number to believe you only got a little bit poorer. 

It couldn’t be any other way though. Regulation skews so savagely against labour. Everything that is designed to ‘help’ destroys it. It seems so obvious and yet so unstoppable. You can tell from the absolute refusal of any CEO to say “we sacked a load of people because of AI”. Nobody would dare. Nobody will dare but it will happen anyway. 

Ultimately, you are either really good with the AI tools, or you are working for the government. 

Lagarde

First, the head of the French Central bank resigned so that President Macron could choose a successor before his own term ends. After all, it’s France, Macron was duly elected and a person can resign whenever they wish.

Now though, the French head of the ECB is also leaving early. The absolute stalwart of this column since the very beginning, our beloved Christine Lagarde. Again, the timing will allow Macron to at least have influence over her successor and indeed a virtual veto right. The appropriateness of this is rather doubtful. European voters did not vote for Macron (or Lagarde). You might consider that machinations like this are rather contrary to the claim of the EU being democratic. 

So far, we have had:

Willem F. Duisenberg (Netherlands): 1 June 1998 – 31 October 2003

Jean-Claude Trichet (France): 1 November 2003 – 31 October 2011

Mario Draghi (Italy): 1 November 2011 – 31 October 2019

Christine Lagarde (France): November 2019 - (In theory October 2027, after Macron leaves)

They started well with a neutral. Now France has had two, Italy has no chance with Meloni in the chair. 

The French strategy is quite clever . The President of the European Commission is also German (Ursula von der Leyen), so it’s quite unlikely that those presidencies would simultaneously be German. 

France is in a tight spot, their borrowing requirements over the next decade are enormous. The last thing they need is a strict German at the ECB, so what must be done, must be done. My vote goes to Spain, but Germany is going to try hard for their man Joachim Nagel.

I couldn’t find bookmaker odds for it but here are mine with a generously priced 102.5% market.

Joachim Nagel 4/5 (Germany - the best candidate by far but German)

Any Spaniard 3/2  (Spain)

Isabel Schabel 19/1 (Germany)

Anyone French 50/1 (France)

Not out of the question that Ursula von der Leyen resigns to help the German case. It’s not a trivial choice. It will set the path for the European borrowing agenda for the next decade. Very important people are resigning from big jobs because the importance of the outcome is clear. 

Euro-Trash

Perhaps you have not heard of Peter Steinberger. He is the author of the AI program ClawdBot. I use it and it is amazing, basically an AI harness that sits on your computer and can do anything you like. His story over the last few weeks has been rather special. 

He launched ClawdBot and was promptly sued by Anthropic over the use of the Clawd name. His software is open source and he is just one guy, so he quickly capitulated. It became MoltBot. Shortly thereafter, he was approached by OpenAI who offered him a gajillion dollars to come and work for them. Now it is OpenClaw. 

It is rather instructive though. Genius German developer writes the most popular piece of AI software yet. It is very good, and the thing everyone has been waiting for. The big software houses (OAI, Anthropic, Google) couldn’t seem to deliver.

One European guy delivers. Next thing you know, he’s moving to San Francisco because in Europe “I get insulted and people scream REGULATION and RESPONSIBILITY”. 

Good luck to him. Cool software, cool story.

Further Information

Our January 2025 report to investors can be found here.

📚️ PDF⏳️ 7 min 📖 6

Ideas

I had, just a few weeks ago, promised you the resumption of bitcoin obituaries. Fair to say I didn’t quite anticipate the violent eruption of the last two weeks, but the responses did not disappoint. 

The journalist in this particular case pointed out that they have ‘followed bitcoin since 2015’ and so are qualified to opine. Indeed, they have been intensely critical of it since then, specifically delighting at each correction. Corrections which have occurred all the way from the 2015 price of $800 to today. 

It makes me wonder. Nothing seems to make people angry like bitcoin does. It seems to elicit extremely emotional responses from people that I cannot really explain. Surely, if you don’t like it, don’t buy it and move on. Add all the usual tropes thrown in ‘based on thin air’ etc. They are all recurring now. 

I would have thought that more and more people would understand proof of work at the very least. To create bitcoin you need to burn an awful lot of energy. It sits right at the intersection of energy and GPU computing, it is absolutely going to meld itself into every data centre so that when they aren’t using all their available capacity to draw pelicans riding bicycles, they will be mining bitcoin. The ‘thin air’ argument is so weak when you consider that specific weakness is absolutely the basis of fiat currency. 

If you don’t like bitcoin, then it is $70,000 too high for you. In the same way, a $15,000 Louis Vuitton handbag is too high for me, because I don’t see the value. For the rest of us, money that cannot be printed, money that does not rely on the government but relies on energy is starting to look like it always did. 

A brilliant idea.

The thing with good ideas, they only perpetuate if they can withstand sustained criticism. Once again I recommend David Deutsch’s Beginning of Infinity which deals with this and much more. An idea, in our case Bitcoin, must be capable of being disproved. People must continually attack it for it to perpetuate at all. Those attacks have been technical, they have been political and they have been journalistic. They have all failed but they do perpetuate bitcoin.

That so many people absolutely loathe it is a source of strength. I don’t republish the criticisms to mock or diminish the authors, I read them and I think ‘is there something new here I did not know’. I do that, others do it too. Consequently, the idea perpetuates, because it is a good one. 

Trueflation

You are all now familiar with the argument that prices should always be falling because of the deployment of technology. You should expect, on balance, at least a 5% reduction in the price of everything, every year. As we know, that doesn’t happen because those technological gains are taxed away by stealth. The official 2% inflation that everyone inexplicably agrees is good plus another 5% of magic money to soak up tech gains. 

What would happen if the technological gains really started accelerating though, could the money printer keep up? TrueFlation is a US site designed to capture the actual cost of inflation in America without all the adjustments that governments tend to make to the official statistics. 

In short, inflation is absolutely collapsing in America because everything that isn’t household goods is falling quickly in price. Of course it is! Things that took 20 developers a year ago now require zero developers. Things that would be useful but not cost effective to build are now trivial one hour jobs. Productivity is absolutely rocketing in some parts of the economy, the most productive parts. 

Why then does that not show up in the productivity stats? First people hid the gains and had an easy life while letting AI do their work. Now though, that game is up. To realise the gains, business (and governments) will have to sack people. You have to remove the non-productive element you no longer require to actually realise the gain and until now everyone has been afraid. Everyone looks at the floor and sees the line is flat, but at a moment in time, even exponents are flat.

A case in point this week, where KPMG allegedly insisted that their own auditor, Grant Thornton, drop their fees because of ‘AI efficiencies’. The accounts reveal that the audit fee dropped by 17%. Arguably it’s a fee nightmare in professional services right now for this reason. Except, it probably isn’t because the savings are likely wildly in excess of 17%. It would on balance have been rather more elegant and profitable for KPMG if they had negotiated a 20% increase in their fee. No better indicator of belief than what you are doing with your own pocket after all. As this year's round of fee negotiations begins, what do the Partners say as clients throw this at them?

The US employment figures show signs of this change, it will certainly happen in the US first and fast. Software job postings are now at 1999 recession levels. This is quickly shifting to other professions too. I suspect though that the US is not in recession, just that the allocation from labour to capital dramatically shifted. 

It will be a recession for labour, but as we will shortly see, not for capital.

100 years of Google 

At their results announcement last week, Google announced 2026 Capex of just short of $200 billion. That is double what the Australian Federal Government will spend, including on AUKUS, all defence capability and whatever else you can dream up. It is just an extraordinary sum.

Of course Google’s cash hoard is well known. At $126 billion, even they don’t have enough. Enter then, the 100 year Google Bond. It forms part of Google’s $20 billion debt raise, the 100 year element (admittedly a small portion of it) will be raised in Sterling because longer bonds have greater demand in the UK than in the US.

I have to say, lending to anyone for 100 years seems a little ambitious, certainly in the tech sector. I mean, I can’t imagine still redeeming a coupon on Carnegie Steel? One of the last issuers of a 100 year bond in the US was JC Penney. In 1997 they issued $500 million in 100-year bonds ("century bonds") with a 7.625% coupon. Intended to mature in 2097, they went to zero in 26 years. 

Overall what are known as the AI Hyper-Scalers are expected to issue $400 billion in debt in 2026 to fund expansion plans. Massive amounts of AI capital being deployed everywhere. In total though the spend will be higher as existing cash balances are also deployed. 

People say “they are building data centres”, I would characterise it as they are building workforces. Me and you.

As an interesting experiment to make the point. Let’s mark 13th February as the point where we measure the relative success of Google Stock (as a proxy for AI exposed capital) versus employment income. My challenge to the labour market is this:

Labour: work for five years in Australia on $150k per year

Capital: Borrow $750k (5 years of gross income) buy Google and do nothing. We will accrue interest compound on the debt and deduct it at the end. 

Bitcoin is $66,500 as I write. 

5 years then. Labour v Capital v Bitcoin.

Obviously the better strategy is to do all of the above but for the purposes of the experiment, let's assume not. 

Incidentally, Google’s headcount on 31 December 2025 was 190,000, 3 years earlier it was …..190,000. Their revenue increased more than 50% in that time and their CAPEX is now 7x higher. 

The returns to labour have stopped. Let’s check in five years. 

Frenchman Quits

The Governor of the Banque de France is quitting. Doing so 18 months early will allow “adequate time for a peaceful replacement”. His term officially ends in October 2027. Had he served the full term the new French President, to be elected in April 2027, would have chosen his successor. Not so now, Macron will choose.

Both men attended the elite university for civil servants ENA (École Nationale d'Administration). Both men then went to Sciences Po. French politics is a club, you see. Christine, one of his other besties, had this to say (she didn’t go to ENA because she failed the entrance exam. Twice). 

Reading that, it’s clear he was important for Europe and for the ECB. Much as I don’t like Central Bankers, he was a good one. He quit early before his term ended for political reasons. Depending on your read, that is either honorable or dishonorable. 

A similar situation arose under Barack Obama where Supreme Court Judge Ruth Bader Ginsburg was urged to resign so that Obama could appoint a friendly. She resisted, to her eternal credit. Jerome Powell too, immensely pressured by the President to quit. Threatened with legal action, called an a**hole and has stuck it out in the most unpleasant of environments. Again, credit to him. 

It's a bit like the ideas piece earlier. If you need to rig the game to win, your idea maybe isn't that good and will eventually fail. 

Euro-Trash

Suddenly, regulation is bad. Beloved of the European Union for so long, the German Chancellor now demands that red tape be “slashed”. How many times have politicians promised this? ‘I will make the economy grow by slashing red tape’. 

"minor corrections to laws are insufficient".

"We need to systematically review the whole set of existing EU legislation."

“While China has grown by around eight per cent each year over the past two decades, the EU has only grown by one per year.”

Germany is obviously a powerful player in Europe. I suspect his intervention will make it a little bit harder to get new regulations approved, but removing old ones in Europe is incredibly hard. 

The European Union bureaucracy itself employs 80,000 people. Those people all have a vested interest in regulation, in monitoring regulation. The monster feeds on itself. How many people that work there want less? How many people will work hard to bring the German Chancellor’s vision to fruition? I suspect none. 

One thing I will say, I was in Europe recently. I bought a Coca Cola, it came in a beautiful glass bottle and was made with real sugar, not the American corn syrup. I rejoiced at the 25 years of effort it must have taken to make that happen. So, I accept that not all regulation is bad but it is possible to have too much of a good thing.  

Further Information

Our January 2025 report to investors can be found here.

📚️ PDF⏳️ 4 min 📖 6

Software

Amongst the various things taking a beating recently (including us) is software, in particular SaaS companies. Investors are asking the question, is this thing worth anything in the era of AI when people can just spin up the software themselves? 

I’m picking on ServiceNow because they have recently been advertising their AI integrations on Australia television, presumably to try and fend off the thing that is eating them. Looking through their products, many of them could easily be replicated by a team of AI agents. They wouldn’t necessarily be as slick and resilient at first but they would at least be tailored to you. You also have to consider that the ability to write business specific software is just going to get better and better every month and the challenge for the SaaS companies will get harder and harder. 

Chamath Palihapitiya launched something this week called 8090.ai. Essentially a company to replace all other software companies. It is literally a team of AI agents that builds or replaces specific software for your business. 

So, you have to ask the question when investing, does this company survive the AI onslaught, and it has to be said a lot of them won’t. 

I raise this issue specifically though because bitcoin is also software. Does it not face the same issue? Answer, no. Bitcoin is open source software so anyone who wants to can recreate it themselves just by downloading the source code. Indeed, over its 16 years of life there have been so many attempts at doing exactly that. All failed. Some examples: Bitcoin Cash, Bitcoin Gold, Bitcoin Diamond (yes, really), Bitcoin2 (they didn’t try that hard), the list goes on. 

Another example is Linux. The open source software that runs the entire internet. In the AI coding boom, Linux usage has absolutely soared because the AI tools are experts at using it and they don’t need permission to do so. 

It just is a very interesting side effect of being open-source that all of the LLMs tend to default to that option. They are always going to choose open source too because they know they can access it without issue and without having to pay. When it comes to them using money, what will they choose? 

One thing about a modern economy is that you need someone else's permission to participate in it. Specifically, you need a bank account. No AI agent is getting one of those because of KYC and frankly the weirdness of it. They can of course download their own copy of bitcoin, run their own node and validate their own transactions. That sounds fanciful, but it is simple and if you asked Claude Code to set up a bitcoin node for you, it could do so easily. 

Price

It’s not too much fun with price action like we are having. The market appetite for what are seen as risky assets is not there at the moment. The ETF outflows continue, as US investors in particular choose to sit out the uncertain impact of AI on their investments. 

The flows across the major ETFs are here, not much positive until the last few days.

Fundamentally though, the backdrop is positive for Bitcoin. It is hard to hear right now because of where the price currently sits, but the scale and pace of technical change at the moment are tailwinds. If there are serious ructions in employment as we have long been suggesting there will be, that will be ultimately positive.

We first talked about Universal Basic Income over five years ago. I believe it is much closer now than before but will take a much more subtle form than UBI. No government wants to imply to people that there is a labour market crisis but I can certainly see the tax system being modified to give labour advantages over capital. You can also imagine all sorts of levies on AI under the guise of its energy usage to pay for it. 

The Fin Review points out that real wages won’t turn positive for another 18 months. I would go further and simply say they won’t turn positive at all. How can they? Anyone who has used a serious AI tool on a complex task for a few weeks knows that this is true. The money will have to come from somewhere though, and we know where. 

Essentially, these are the moments Bitcoin is here for. The economic scenario we believed would come is playing out and that is the important thing.

Euro-Trash

I came across an interesting site the other day which attempts to explain American economic dominance. A more dispassionate analysis I thought than the Trumpian nonsense we get exposed to. It does seem to be true that there is always a war on Europe's doorstep, there is a demographic disaster unfolding in birth rates and they certainly have an energy crisis. 

Some of the more interesting data on the site. 

“The Texas-Louisiana Gulf Coast hosts the world's largest concentration of refining capacity. Over 9 million barrels/day—more than all of Europe combined—processed within a 300-mile stretch.”

The US then exports 6 million barrels a day of refined energy products.

One thing it sees that the US understood and Europe didn’t is the importance of energy independence. The other thing is nearly everything in the list (save for the Geography) Europe could have if it wanted it. 

We discussed Chritine’s SWOT analysis last week, she could do a lot worse than look through this website.

Further Information

Our January 2025 report to investors can be found here.

📚️ PDF⏳️ 7 min 📖 6

Something changed

The most popular day of the year for financial fraud is 24th December. Everyone is in a rush to get payments out of the door and leave early. So if you slip in some urgent invoices, change bank details you have a chance. What’s more, nobody will be back until early January by which time our fraudsters have whisked your money to Brazil and your bank has no chance of reclaiming it. 

It’s a good day for politicians too, lots of horror announcements are made on the 24th because nobody is watching. Then, weeks of quiet. Christmas, New Year. 

This year I felt as though something profound changed over that period. The AI labs dropped some major releases just before Christmas. The reason being that usage drops and they can test their new toys without overloading servers etc. Claude Code for example upped usage by 2x between Christmas and New Year. What happened was an explosion of activity. It became obvious to anyone using them every day that the new models were in a different league to everything that had gone before. They can quite literally build and deploy entire websites in minutes (complex ones not just landing pages). It is the agentic capability of the new model that is the most impactful, it can work for hours on problems.

Andrej Karpathy coded Tesla's self-driving cars. Here’s what he thinks. 

Almost nobody is in this guy’s league as far as programming is concerned. Yet, he cannot compete with the machines and just leverages them. He went on to point out that rather than code less, he now codes more. In the past it would not be worth the effort to automate some things because of time and cost, but now that time and cost is almost zero, everything can be coded. 

Perhaps most significantly amongst the Anthropic releases of the last few weeks was the revelation that they were almost entirely written by Claude itself.

What of it though? Well it’s up and to the right. There are people using swarms of agents now to build websites, do SEO, marketing. But Karpathy is correct “awareness in the general population feels well into low single digit percent”.

One of the highest paid jobs of the last 20 years basically went to zero and almost nobody noticed. Of course it will take time to filter through and nobody is firing their best engineers because they are actually best positioned to understand how to exploit the new toys. Employing new people though; maybe not. 

You have one task for 2026. Launch a simple website with Claude Code. Add bitcoin payments to it with BTC Pay Server. The first one will take you a month. The second one a week., then an hour, then 10 minutes. It’s nuts, but you can ride the exponent yourself and have a fully financially operational website which runs at zero cost (even hosting is free on Cloudflare and payments are free with BTC Pay Server).

The weirdest bit though was the shift happened over the break while nobody was looking. A seismic shift under the cover of the holidays. I felt something changed, but let’s see. 

Confidence

Despite the low awareness levels, something is moving through to the labour market. Not so much that employment is an issue but certainly getting a payrise is. Only 15% of Americans are expecting an income increase this year. 

On the face of it the US economy isn’t having any difficulty at all. 5% growth in Q4 is like them adding an entire Australian economy. The issue appears to be that the gains are all going to a small group. 

It’s really hard to compute, but labour isn’t a thing anymore. The one thing standing in the way is robotics and that transformation of AI into the physical world is going to take longer. 

Two pieces on that theme. The first from Hamish Douglass who predicts an employment ice-age with 15%-30% unemployment. Then this on who the winners in the new world order are likely to be. In short it is likely better now to employ one person who knows deeply how to use agentic AI, they can do the work of 10 people. Even if you pay them $1m, it’s still better than 10 people on $100k doing it themselves. 

Maybe there will be an employment ice-age but if in fact you can coordinate 100,000 agents by the end of the year I predict you will be a very valuable person. Simply adopt the tech, immerse yourself in it and you will be a winner. 

Why is bitcoin not doing anything?

Long periods of boring consolidation are actually a feature. Bitcoin generally front runs the market, as it did prior to the last US election. It even does so on weekends. The general direction on Saturday and Sunday is often a precursor to the equity market opening movements. 

If I were to make an estimate of how much longer the boredom will continue it would be another six months. At that point we are 18 months out from the next bitcoin halving and believe it or not, all eyes will be on 2028. Anyway, expect a few obituaries over the next few months. We can add them to the list. 

Cheat

Australia’s inflation problem has returned. Economists are aligned on ‘government spending’ being the issue or immigration pushing up the cost of everything. Maybe. 

Historically, governments have fought inflation simply by cheating. We covered this a year or so ago in ‘The Theft of Progress’. Essentially we get better at everything because of technology, so prices are always falling (believe it or not, but they are). This trend basically covers up the government's incompetence, which causes prices to rise. For it to work though, you have to actually adopt technology at a higher rate than your incompetence. If you just ignore it then you get an inflation problem. We have many examples in Australia

1. Energy: we are adopting very old technology. For a country that is the Saudi Arabia of gas, why are we importing so many wind turbines and littering the countryside with them? That technology is from 1500 and will not lower prices. 
   

2. Self Driving Cars: Australia is perfect for these. It's a very simple road network and generally employs traffic lights not roundabouts making it even more suitable. The problem of self driving is solved. Why don’t we have it? The present arrangement is this:

South Australia, New South Wales, the ACT and Tasmania said they had allowed the introduction of the technology, provided the driver — who remains legally responsible for the car — maintains supervision and control. A spokesperson for Western Australia's Transport Department said drivers were required to keep both hands on the steering wheel when using FSD, while Queensland's transport department requires only one.

That is exactly how Australia does it. You need both hands on the wheel in WA and only one hand in Queensland? How does that help? What is happening North of the Tweed that means they only need to use one hand when zero hands are required. As for everyone else they need to use two? 

In the US insurance companies are halving premiums for self-driving cars because they are so much safer, demonstrably so. The number one danger to the public (children in particular), the road, could be so much better and so much cheaper. The technology is literally begging to be used and we protected our children with a social media ban rather than stopping them getting hit by cars? 

3. Payments: everyone loves OSKO. Instant payments are now 95% deployed. China has had it for 10+ years. Same in the UK (Faster Payments) and Europe (SEPA). Australia was very slow. 

The list just goes on and on, including housing regulations and planning regulations all of which serve to slow down the adoption of technology. 

Government spending is not the issue. The speed of adoption of technology is. My advice to Dr Chalmers (which he hasn’t asked for) is to cheat like governments always have. Cheat hard, introduce technology at warp speed. Watch the cost of things drop through the floor, claim credit, become Prime Minister. You’re welcome. 

Japan

After lying dormant for years, Japanese bond yields have absolutely exploded recently. The 30 year yield now sits just below 4%, slightly higher than Germany’s. 

Japan’s debt to GDP ratio is 240% compared to Germany’s 65%. There is absolutely no doubt that Germany can afford its debt load, probably for the next 30 years. Japan? Not so much, collapsing population, spiralling debt, how is it possible their borrowing rate is the same?

The answer is quite simple. In 2013 the Bank of Japan owned 13% of government debt. Now they own 55% of it. More specifically though they began tapering those purchases in 2024 but only for JBGs with a maturity of 10 years and under, they continue buying long dated bonds but don’t disclose holdings by maturity. So it is entirely possible that the Japanese central bank now owns over 70% of those long bonds, it could be more.

We know how this is all done too. They simply print the money and who cares? We have talked about this for years and Japan is still Japan. Whatever they have done to their collapsing bond market has worked, most western nations are going to follow their lead. 

Sure the Yen is down 30% in 10 years against the dollar, it will likely drop further. That is the path for all indebted sovereign nations. Their pensioners will gradually go on fewer foreign holidays, they will see the doctor after a slightly longer delay than before. They will be poorer. People also seem to understand and accept this, hence the race to acquire hard assets. 

Euro-Trash

A big SWOT analysis! I can hardly wait for the output of that, if history is a guide it should be ready in 2035.

One of the things I would include would be this chart.

The EU economy was larger than the US in 2008, then something happened from which Europe would not recover. The US economy will likely be twice the size of the EU in the next 24 months. You really have to look at that and wonder what happened, will a SWOT analysis really cut it. 

Europe is precisely as wealthy as it was 20 years ago, which is alarming when you consider that the GDP figures probably vastly underestimate the impact of inflation. A reasonable estimate would be that the majority of people are in fact poorer than they were in 2008. 

One of the things Europe will have to do if it is to restore its independence is wean itself of the American tech stack. France started the process this week announcing its intention to replace Zoom, Google Meet, Microsoft Teams, and other videoconferencing software in its civil service. The "sovereign solution" will be ready by 2027. I suspect that will not be that easy because those companies have been refining their software for decades. How good will Le Zoome actually be?

Until Le Zoome takes off then, European relevance on the global stage continues to drop. Once a quarter of the world's economy, now roughly half that. 

Further Information

Our December 2025 report to investors can be found here.

📚️ PDF⏳️ 6 min 📖 7

The Quantum Problem

Does Bitcoin have a quantum problem? The answer here is, yes. Specifically, some of the encryption on which bitcoin relies, notably ECDSA, is vulnerable to quantum computers. In reality the most exposed coins are those very old Satoshi coins (about 8% of the total supply), and those coins where people have reused addresses and exposed their public key in the process. The overwhelming majority of coins are not in fact at risk because they have never exposed a public key.

The particularity here is that a quantum computer can in theory do calculations classical computers cannot. The question is, how would we ever know the answer is right if we cannot check? Cryptography is the answer to that question. We do know the answer (the public key), we just can’t go back in the other direction from answer to question (private key) - that's what cryptography is. A quantum computer can, and in so doing it will prove it has powers classical computers do not. Actually a very exciting technology then. 

More broadly the quantum issue is not just a bitcoin issue. Every financial institution in the world is vulnerable here. All our passwords, our access to websites and banking, they are all exposed because they all use encryption to protect access. This issue is known by major governments around the world who are moving to post quantum cryptography by 2035 in most cases. There are a lot of different estimates about when cryptographically relevant quantum computers will be available. Some believe by 2030 (often private companies raising money) but the history of quantum computing is that it is hard and takes longer than expected. After all, we have been promised fusion power since 1940 and never got it. 

Bitcoin’s advantage is that the developers understand cryptography. The risk to bitcoin is very well and very specifically understood (although the timeline is not). A bitcoin improvement proposal is already underway. BIP360 written by the predictably pseudonymous ‘Hunter Beast’ proposes an upgrade to bitcoin which will provide quantum proof hashes. There will be several steps along the way to the upgrade but it is certain that work is underway to do it. I would guess there are 10 years (and probably more) to get this right. 

Almost no other industry other than defence departments are actively working on this issue. After all, bitcoin is an adversarial system. Trust nobody. It does not surprise me at all that DARPA, ASIO, GCHQ and Bitcoin Developers are all working on the same thing. Meanwhile the banking industry is still trying to stop their app going down on a Saturday morning. 

I read that quantum computers are going to kill bitcoin. They aren’t. They will expose the Satoshi coins, that is certain. But they are no more relevant than the Mount Gox distributions we experienced this year. The issue of quantum computing is much wider and we should be glad everyone looks to bitcoin first. 

Therefore, send not to know

For whom the bell tolls,

It tolls for thee

Let me explain

You’d have to say that on the trend of inflation alone, a cut in US interest rates wasn’t really warranted. Trueflation reports 2.7%, the government itself reports higher 3%. It’s a gigantic proportion over the supposed 2% target. 

The value of money halves in 35 years at 2%. More than a generation, a smart choice really because you don’t notice. At 3% it's 23 years and at 5%, a mere 14 years. That seems closer to today's experience. 

Given the inflation backdrop then, the Fed's sense on employment data must be strongly negative and perhaps that explains the other and far more surprising thing they did last week. The announcement that they will be buying $20 billion in T-Bills every month. 

The Chairman waved away any suggestion of QE explaining as follows:

“Reserve Management Purchases (RMPs) are made to prevent a tightening of short-term liquidity ahead of the April 15 tax payments.” 

The idea being that everyone withdraws money from banks in April to pay the government. So we need to get ready and make sure banks have the money to give to the people, to give to the government so they can give it back to different people.

It might be true. But, wouldn’t it always be true every April? 

It’s quantitative easing-lite. It will make the journey to actual QE less stark. Unsurprisingly, I expect that to happen sometime after April which happily coincides with the end of Jerome Powell’s term as Fed Chair. 

Probably unrelated, right?

A new ETF

In 2018 I was invited to a dinner in Sydney to discuss bitcoin. Hosting was Olaf Carlson-Wee who was Coinbase’s first ever employee. He brought with him a slew of American bankers and finance experts, one of whom spent most of the dinner explaining to me why there would ‘never be a Bitcoin ETF’. There were in fact a lot of reasons at the time, recall the Winklevoss brothers first applied (and were rejected) in 2013. His main reason was that “the SEC at the time ‘just hates it’ ... .there is no way, it's just not going to happen”.

As we know, it did in fact happen and now there are many ETFs with little separating them other than brand, until now. Nicholas Financial has filed for an ‘After Dark’ Bitcoin ETF. They will sell their bitcoin just before the US market opens and buy it after the close. The reason being that most bitcoin gains (historically) have occurred outside normal trading hours. 

The full application document is here. Arguably, it's a little bit gimmicky but it may in fact find an edge. All the other bitcoin ETFs need to buy and sell at the same time as a result of US market trading hours. Selling when others are selling and buying when they are buying is always going to be a bit more expensive. 

It reminds me rather of pre-financial crisis Goldman Sachs. Prior to 2008 they had a November year compared to almost all other banks which had a traditional December close. The rationale was they could take advantage of December when other banks need to buy and sell things to tidy up their balance sheets. 

All banks do the same things in December because they have to disclose what they own. Ditch the riskiest assets, buy the safer ones. That kind of thing. Goldman happily mopped them up. This ETF might be a gimmick, but it might just outperform all the others. 

Incidentally, Goldman was bailed out in 2008 and forced to convert to a bank holding company. They also were required to move to a December year end, like everyone else. Unsurprisingly, they started to perform like everyone else from that point onward.  The aura was gone, they were different and suddenly they weren’t. 

OK to buy

The OCC doesn’t write many letters. Back in March this year they wrote to US banks (letter 1183) about what was permissible as far as cryptocurrency was concerned. Now they have written again, “you can buy and sell bitcoin for your clients”.

Hardly earth shattering but they make their decisions slowly and rarely change them so we’ll take it. 

Last one for the year

That is it for 2025 MoneyBits. The big winner this year was not bitcoin, it was Christine Lagarde.

Lamfalussy Award in January (‘honoured’)

Sutherland Leadership Award in April (‘delighted’)

Global Leadership Award in July (‘honoured’ again)

Strong 2025 from Christine. A year in which the European economy went backwards. They managed to destroy their already tiny AI industry and the only time they met the 2% inflation target were the months when they were all on holiday. 

Time for one more Euro-Trash then, obviously. 

Euro-Trash

The Elon-EU spat kicked into overdrive recently when they fined him for €120 million for “deceptive blue ticks”.  You get a blue tick if you pay some money and fill in a form. 

The European Union’s argument is that the level of verification is “too minimal”. A blue tick gives the impression that the person may be who they say they are and so the European public might be misled or defrauded. So, that will be €120 million, please. 

There is some truth in the fact that the blue ticks are not perhaps as robust as they once were. You had to qualify for them and couldn’t just buy them. So maybe they have a point.

There was more to the fine though than the blue ticks. X was accused of failing to hand over data to “researchers”. Those “researchers” are basically the new Euro-Stasi who hunt down Europeans unfortunate enough to have said something unpopular on social media. You know, like ‘maybe windmills are technology from 1600?’ or ‘I can’t take the lid off my water bottle’. When that happens Euro-Stasi demands information like IP addresses and emails so they can track down the user and send them to a re-education camp at Davos. 

Failure to provide researchers access to public data

X fails to meet its DSA obligations to provide researchers with access to the platform's public data. For instance, X's terms of service prohibit eligible researchers from independently accessing its public data, including through scraping. Moreover, X's processes for researchers' access to public data impose unnecessary barriers, effectively undermining research into several systemic risks in the European Union.

The fine issued today was calculated taking into account the nature of these infringements, their gravity in terms of affected EU users, and their duration.

All told though it’s good business. The EU made more from fining US tech companies in 2024 than their entire tech-sector paid in tax. Unlikely to be sustainable and life will get quite interesting quite quickly if the US tech titans simply reach for the off button. One day Europe’s economy will be small enough to be a rounding difference so don’t discount the possibility.

Further Information

Our November 2025 report to investors can be found here.

📚️ PDF⏳️ 4 min 📖 7

Vanguard (again)

December 2024. We are never doing it. 

December 2025. We are doing it.

I was impressed when they held the line last December and said no. 

Money talks though. Clients want the asset class, advisors want the asset class and Vanguard had no choice. We have had several months of ‘nobody wants bitcoin’ news. If that were really true, why is the BlackRock Bitcoin ETF the most successful ETF ever (in terms of first year flows)? Why has the second largest fund manager in the world (AUM: $9.3 trillion) just added it to its platform?

Not just Vanguard either, Bank of America Private Wealth also changed their minds this week.  I’m not sure “recommending” is the right way to go about it. Even so they are suggesting 1-4% to their clients, of which there are 70 million. The Bank will begin covering the big bitcoin ETFs from January 5th 2026. 

One trend

The trend is most profound in East Asia, but it is also true in Europe. Whatever the reasons are, from an investment perspective this is going to drive a massive increase in automation. It is generally presented as a negative, collapsing birth rate = extremely bad. Perhaps though, it is indicative of enormous inbound potential. The remaining Chinese people might become very wealthy. 

Reversing a birth rate decline from 1.0 is extremely difficult. The point of no return here is not the total birth rate, more the number of women from 18-35 versus their predecessor cohort. China is producing 45% fewer future mothers than it did 20 years ago. In another 15 years or so, that cohort will halve again. China has passed the point where its net reproduction rate (daughters per woman) could be reversed. Net reproduction rate is different from fertility rate; it measures daughters per woman. 

NRR < 1 → population eventually shrinks
 NRR < 0.7 → the trap deepens
 NRR < 0.5 → irreversible without immigration

China’s estimated NRR in 2023: 0.46–0.50. Irreversible.

I would write “if this is true” but it is likely more than true. The official figures on the Chinese population may not be all they seem. They do have a habit of adding a bit of GST in Beijing so things might in fact be worse. In this analysis the implication seems to be that the TFR fell below one quite some time ago and may now be under 0.9. That would put the NRR well below the reversible range.  

The longer term investment themes here are quite obvious. Automation, robotics, hard assets (because debt burdens are unsustainable). India, Philippines, Indonesia & Vietnam would seem to be  the natural successors.

As for Australia, it won’t be that good to have our largest trading partner halve in size. When it comes to iron ore though, Indonesia is only 320km away (shortest point to point). Brazil is 15,000km away, the marginal cost advantage will remain with Australia. 

If it happens, it will be luck and not good judgement.

Vanke

Given those population dynamics, it is not entirely surprising then to see this kind of thing in China. Vanke, once the largest property developer in China, has seen its bonds collapse this week to 30 cents on the dollar. 

No doubt there will be some sort of bailout here but Vanke is big and if they fall over they will take a few others with them. They are the last of the major Chinese developers to fall over. Country Garden and Evergrande defaulted long ago and estimates put eventual recoveries in the range of  25 cents to single cents on the dollar.

Back to our demographic theme, bonds are terrible investments in falling population environments simply because there aren’t enough people in the end to pay the interest and certainly not the principal. Arguably, this is not what has happened here but it may just be the case that they built a load of apartments and there just aren’t the people to buy them.  

I wonder if this is the reason that population issues are not much discussed by the government. It doesn’t take that much googling to find out the net result of a collapsing population. 

The Raven of Zurich

Suffice to say, the destiny of fiat currency was written a long time ago.  

Euro-Trash

Europe's leading AI company (there is one, Mistral) released their latest models this week. Their “State of the Art Model”, Mistral 3.0 is both enormous and not very good. It is 5th in the table of open-weight models and nowhere near the top American versions. 

The thing with these models is users just default to the best one, or maybe the second best one. Nobody is going to change behaviours to downgrade to the 55th best model because it happens to be European. It is also 3x as expensive to use as DeepSeek,  a superior model. 

For the purposes of this section of MoneyBits I follow a lot of European accounts. Perhaps for that reason my feed is now full of pro-European propaganda. New accounts which the EU must have launched earlier this year. They are all less than 12 months old, have implausibly enormous followings and all love European tech. 

It was non-stop overload this week about how wonderful the new Mistral model is.

But Mistral is not close to the top Chinese models. Kimi-K2 is an outstanding model which is genuinely close to OpenAI and Google, Mistral is nowhere near. Not close. 

The issue appears to be that the cost of training large models is enormous. Google, Facebook, AWS, the Chinese state actually have the money to do it. Google’s cash balance is $95 billion. Considering that significant European countries like Belgium only collect $200 billion a year in tax in total, it's not a huge surprise that Europe doesn’t really have the cash to compete. They could, in theory, collate funds across the EU and do it but then who owns the IP? There would be a never ending squabble about the division of spoils and it just wouldn’t work. 

Compare that to Google. The driving force and major shareholder Sergey Brin has said he is willing to bet the entire company on AI. One person can decide, not the committee approach of the European Union. Same at Meta, Zuckerberg is losing badly because the Llama models are no good, but he can bet the house on it without really worrying too much. He can summon $50 billion or $100 billion if he needs to, but Mistral just raised $1.7 billion to great fanfare which isn’t going to get them anywhere. 

We are almost at the point where it has become a nation state game. The top AI models are transformational for nations in terms of defence, health, education and R&D. You can see why governments might want to get involved. It seems even more obvious when deeply underwhelming models are released along with coordinated, state funded, propaganda campaigns. It’s quite the era we are entering.

Further Information

Our November 2025 report to investors can be found here.

📚️ PDF⏳️ 7 min 📖 6

UK Budget 

I’ll tax them on their dog

Tax them on their cat

I’ll tax the man, and his wife

On this and that 

I’ll tax them when they fly

I’ll tax them when they die 

Some extra pennies, you know

When their loved ones die

I’ll tax them when they drive

however hard they strive

3 pence per mile

enough to make us smile

I taxed them in the morning 

I taxed them at night 

They won’t even notice 

It will be alright

Amongst the lowlights were the new road taxes. Three pence per mile for electric cars. I imagine this being deeply unpopular simply because of how it will eat away at people. Driving down the road knowing every extra metre is costing them tax. On average it's about £250/year but that's not really the point. It’s the depressing relentlessness of the government take. The proverbial boot on the throat; very bad politics. It was always true anyway with fuel taxes but they are slightly more obfuscated. Charging per mile seems so raw, such a direct assault on daily life I wonder how it will be received. 

There were some new ‘wealth taxes’ too. The Mansion Tax targets homes valued at £2m+ and £5m+, which will now attract annual levies of £2,500 to £7,500. It’s another bizarre tactic to chase rich people away in a country where 50% of the tax revenue already comes from only 1% of the people.

I had a quick look on RightMove to see what kind of mansion you get in London these days for £2m. This place in Southfields, South West London looks fit for a King. Not sure the real estate agent tried that hard, not bothering to cut the grass or shoo the staffie out of the foreground. Here’s the link if you want to throw in a bid.  

Most iious of all though the continued freezing of the income tax bands. In 2021, during Covid, the bands were frozen. The government of the moment said “everyone must play their part”, in what were difficult times. 

By the time the following year rolled around the freeze was extended until 2028. On Thursday this was extended to 2031, a full decade of zero-indexation. This is exactly how financial repression works. It is very clever really because the government can legitimately claim “no change”.

The extent of the punishment is modelled here. This assumes a pay rise each year of 3% and a true inflation rate of 5% (which is me being generous). The purchasing power over the decade drops by 20%.

This is not an exaggerated ‘look at what might happen’ scenario. It's a fairly generous appraisal of the situation. 

The band freeze is now the single biggest tax rise in the history of the United Kingdom. Even more amazing, neither the party that introduced it, nor the one that extended it had it in their manifesto. Nobody voted for it and nobody got the chance. 

Overall, it was a terrible day for everyone in the UK. The bond market barely blinked though suggesting that just the right amount of financial punishment has been meted out to keep the show on the road a little longer. 

1250%

1250% risk weighting seems a bit excessive, no? 

Indeed it is rather revealing about the general fragility of banking. At present the Basel rules require (amongst many other things) that if a bank makes a $100 loan, $8 of that loan needs to be with its own money. $92 of it can be borrowed. Before we get into the addition of crypto assets, we should just remember that. The minimum requirement for banks is to be 8% backed with their own money. Hardly robust stuff, as Credit Suisse shareholders discovered. 

If a bank adds $1 of stablecoin to its balance sheet, the Basel rules say it must add $1 in equity so that it is fully funded. That is the highest weighting of capital requirement for a bank, 1-for-1 backing, only for the very riskiest of assets. From that we can derive an assets risk weighting of 1/0.08 = 1,250%

In essence the rules simply say that the addition of crypto assets cannot alter the risk profile of the bank.

I have no doubt that for lots of assets in the sector it is a sensible choice, but for stablecoins it’s over the top and then some. For example, if our bank adds $1 of Tether, that Tether itself is already 100% backed by a US Treasury bill. Why then does it need to be additionally backed by $1 of the bank's capital. $1 of Tether is far safer than $1 in a counterparty bank account, which also enjoys only the 8% backing. 

The Basel risk weighting for deposits at other banks is about 20%. So for $100 the bank is required to hold $100 0.08 0.2. $1.60. 

The implication is that a 100% backed stablecoin is 62.5x more risky than an 8% backed bank deposit. It cannot possibly be correct and it's hardly surprising that the US and the UK have said so. 

It rather gives off the whiff that the rules are designed to protect the incumbent operators cartel rather than to meaningfully do anything for the risk exposure of the end customer. 

MSCI

One of the reasons behind the recent sell off is the review of Bitcoin treasury firms by index provider MSCI. They run all manner of funds and indices across global stock markets.  

Their contention is that a company that holds more than 50% of its assets as digital assets is more akin to a fund than a company. Perhaps that is right, but plenty of companies hold an awful lot of cash and not much else, and they are included on the basis of their underlying business. 

The most exposed firm in the short term would be Strategy (MSTR). Michael Saylor had this to say.  

I think his argument is a reasonable one. Decision day on all of this is 15th January, my guess would be that pure treasury play companies that simply list and then buy bitcoin will be excluded from MSCI as quasi-funds. Everything else, including Strategy, will stay. 

In the end though what difference does it really make? If someone wants bitcoin, they can buy bitcoin or they can buy the ETF.  I’m not actually a fan of treasury companies save for the first mover, Strategy. They now have the scale to design innovative products. The rest of them are…..well they are funds, and in that respect it’s hard to disagree with MSCI. 

Nano-Banana

If you haven’t had a go with Google’s new Gemini-3 you really should. In particular the new image generator is super impressive. In this case I loaded the PDF of Moneybits (excluding this section) and told it to visualize this week's effort as a whiteboard. This was a single shot effort, one prompt. It completely grasps what each section is about. I would think with a couple more prompts it would be even better. 

It’s a depressingly good summary in 10 seconds. 

Note this works on entire volumes of text. You could drop your favourite book in and it would do it too. 

It is far better than this simple demonstration though. I have found the more complicated the inpt (at least to my mind) the better the output from Nano-Banana. That is particularly true with things that I don’t fully understand. Like computer code or some complicated smart contract, it is outstanding at breaking down the concept and putting it on a white board. 

Massively underrated, Google is a mile in front on AI now. The core theme of MoneyBits which is of poking fun at Christine Lagarde is ignored in the bottom quadrant. Encouragingly, it seems if we want to be rude about our leaders we will still have to do it ourselves. 

Euro-Trash

It’s been at least a few weeks since Christine won something. I was worried, you were worried, we can now relax. Included in Time Magazine's Climate 100. Expressly for the following reason:

On July 29, Lagarde's ECB announced that starting in the second half of 2026, it will adjust the value of polluting companies differently than clean ones when banks need to borrow money. This was done to protect the Eurosystem against potential declines in the value of the polluting companies in the event of adverse climate-related transition shocks. 

Here's how it works: when banks borrow from the Central Bank, they must put up assets as collateral (like a security deposit). Under the new rules, assets from companies that could cause higher climate risk to the central bank will be worth less as collateral. This matters because it could make lending to polluting industries more expensive for banks. 

The most impacted sectors are fossil fuels, energy-intensive industries, heavy manufacturing, construction and building materials. We can see now why the big oil companies want to move their bases out of Europe and to the US. Far better in their view to be a US company than a European one. 

The ECB has managed to do this within the existing risk rules essentially suggesting that these industries are “most at risk” during the climate transition and therefore their collateral is worth less. Arguably, correct but they are also the industry Europe most needs. They are meant to be building a new war machine, how will they do that without energy and heavy industry?

One thing stands out to me. The fashion industry. How does it escape criticism? How is it that a coal fired power station that powers children's hospitals and heats the homes of the elderly viewed with such cynicism and the $5 t-shirt industry, a far bigger polluter, just waltzes on by? 

Fashion comprises 10% of total global carbon emissions, as much as the emissions generated by the European Union itself, and all its energy and heavy industry. The industry depletes water sources and pollutes rivers and streams, while 85% of all textiles go to dumps each year. Even washing clothes releases 500,000 tons of microfibres into the ocean each year, the equivalent of 50 billion plastic bottles.

That is the issue with the ECB approach, it's arbitrary. All industries are downstream of energy and heavy industry anyway. There are massively polluting industries that just get away with it because they haven’t been demonised in the public perception. What’s more, all these policies just push up the cost of living for everyone. 

Is this policy really worth lauding Christine Lagarde for? I can’t think of a better example of how a central bank has become so politicised that it can bend its own risk rules to try and derive a political outcome. 

They have one job. Keep the price level stable. They haven’t done it, ever. All this is all a distraction from that abject failure. 

Further Information

Our October 2025 report to investors can be found here.

📚️ PDF⏳️ 5 min 📖 4

Unhinged

Cue outrage. 

I have mixed views on Elon, I’ve gone from not really believing in him (or Tesla) to just being wrong and him being right.

Elon was accused of being “completely unhinged” after his remarks about Optimus, which included that it will ultimately be better than any human medical surgeon. He is unhinged though. Isn’t that the point? Nobody can argue that he does send rockets to space or indeed that he then catches them with giant tweezers when they fall back to earth. His company built self-driving cars. His other company built one of the very best AI platforms from a standing start in about three months. He is absolutely unhinged, and absolutely detached from the reality of the rest of us. 

Amongst the many thousands of critics, where were their ideas for eliminating poverty? What about the general idea of expanding the opportunity set for everyone? There were no ideas. None. It was all confiscatory talk about taxes on the uber-wealthy and criticism about his “trillion dollar pay deal”. In fact, that pay deal is today worth zero. In order to earn it he has to 4x the market cap of Tesla, build and sell one million Robotaxis, build and sell one million Optimus robots. 

Of course, politicians chimed in too. Senator Roland Gutierrez of Texas might live to regret his intervention though. Complaining that American’s can’t afford groceries and ‘Elon Musk wants to become a trillionaire off our backs’. His skewering was one for the ages: 

“Let the makers make”. I for one hope he does it. 

Nuked

Lots of things are down. Like my mood.

When you consider that earlier in the week some of the top tech stocks are down 5-10% why are we down more? Perhaps the obvious answer is simply the volatility of this asset class is still much higher than others. We wish it wasn’t so, but we should of course be careful what we wish for. One day it won’t be, and we will be sad and bored. 

If we think a little longer term, like more than 7 days, perhaps 700 days. What have we got coming?

• The US is preparing $2,000 stimulus checks (Tariff dividends - lol). Naturally they will be timed with the US mid-terms next year. 

• Japan is preparing a $110 billion stimulus package 

• China has approved $1.4 trillion in stimulus

• QT ends in December

• The US is issuing a net $2 trillion in debt next year (minimum)

• More rate cuts incoming. 

The NVIDIA results on Thursday set the tone. They were excellent, demand for AI continues to soar and the machines are getting better and better. All the while the labour market gets worse and worse. 

The money printer is coming. It has to. 

Meanwhile Bitcoin? Doing what it always does. Disappointing us when we least expect it.  

Invisible prices

The majority of people have a binary view of Bitcoin. Love it or hate it. They also have a binary depth of knowledge. They know the price, but don't know anything else. So, if someone says to me “what about Bitcoin?” they mean price.

In today’s economy though there are far more important price moves. The single most important, I think, is the price of intelligence which just about collapsed to zero. It’s an invisible price though, so you never hear it.

“How are you John? what about the price of intelligence has collapsed to zero!”

Specifically, this week I am talking about Gemini 3 which came out on Wednesday. It swept the board on all measures of AI benchmarks. Most impressively in my view on MathArena Apex. These tests are previously unpublished problems that it is not possible for the AI to be trained on. Gemini 3 scored 23%, GPT5-High, 2%. It is a massive leap. 

For context, these problems are not something most of us could even attempt. Perhaps while you were in the zone at university you could have had a crack. Now, no chance. 

The full scoreboard below also includes something called Vending Bench. This is a monetary measure where the AI has to manage a vending machine over time. It's a fascinating test because the AI has to keep context throughout the test, something that they have not been very good at. They need to order correctly for their specific customer set, keep stock levels correct depending on conditions and get the pricing model right. Basically run a business. Gemini 3-Pro is a huge leap here. 

We obsess about the price of assets, houses, bitcoins, stocks but the number one asset that you own and command - your own intellect. It just got rugged. Arguably, your 20 years of schooling and university they just had a 1929 moment.  Yet nothing. Silence.

There is a good summary here about Gemini3 from Ethan Mollick.

So is this a PhD-level intelligence? In some ways, yes, if you define a PhD level intelligence as doing the work of a competent grad student at a research university. But it also had some of the weaknesses of a grad student. 

I mean LOL. Only a university professor could say it has “some of the weaknesses of a grad student”. In fact, that's actually how good it really is and it's basically free.   

Euro-Trash

The Democracy Shield is here. Phew! Another set of laws that absolutely nobody in Europe has asked for. Happily, these laws aren’t like other EU laws and will present no regulatory burden at all. I would urge you to read through this text heavy summary and I feel certain you will agree. 

1. Safeguarding the integrity of the information space

The Commission will further work with signatories under the Code of Conduct on Disinformation and prepare a Digital Services Act incidents and crisis protocol to facilitate coordination among relevant authorities and ensure swift reactions to large-scale and potentially transnational information operations.

What is disinformation? Interestingly a word derived from Josef Stalin's propaganda machine ‘dezinformatsiya’. I have no idea how the EU plans to decide what is and isn’t true. If anything is a matter for their beloved citizens then surely it’s that. 

2. Strengthening our institutions, fair and free elections, and free and independent media

The Commission will step up action to support the EU's existing framework to combat abusive lawsuits against public participation (SLAPPs)

What? I don’t know. SLAPP? Turns out a SLAPP was invented in 2021 and the EU came up with some guidance to stop people being slapped (not physically, so they mean SLAPPed) 

The guidance on not SLAPPing was ignored and now we need new laws.

3. Boosting societal resilience and citizens' engagement

To help recognise and counter information manipulation, the Commission will roll out measures to foster media and digital literacy for all ages. 

The invocation of citizens! Is there anything creepier?

I wonder which citizens actually asked for this though. I know lots of Europeans and none of them ever bring up that the media is not free or independent. They are far more concerned that the government controls it or does stupid stuff that means they can’t watch YouTube.

The EU has promised huge funding in addition to the $9 billion already committed to its EU Agora program. What? Yes. Agora. It astonished me when I read it. If this is not the EU complaining that their propaganda machine is broken……….

The European media industries are a beacon of quality and creativity, but today they compete with global online platforms for the attention of citizens and consumers. Circulation of EU audiovisual content continues to be fragmented along national lines, and non-EU players capture most of the box office and streaming subscriptions. While the video game industry has gained a strong foothold in contemporary digital culture (more than half of the EU population regularly plays video games), the Union’s video game market continues to be largely dominated by global competitors. Finally, the integrity of the information space is at risk through the spread of disinformation and the growth of foreign information manipulation and interference by hostile actors, such as Russia. Threats against media pluralism are compounded by phenomena such as concentration of media ownership. In parallel, news media experience declining advertising revenues and sales, as digital competitors have captured an increasing share of revenue and shaped consumption habits. As a result of all these factors, media viability is under pressure.

Is it odd? People play foreign owned video games, ergo the ‘information space is at risk’. 

Of course, I mock them every week but they are not stupid. To control the population you have to control the message. Europe is grappling to do so and losing. The Democracy Shield is a Shield only for the rent-seekers of the EU bureaucracy and intelligentsia. 

Tactically they are also right. Foreign governments do try to interfere in elections, no question that they fund campaigns for or against particular themes. The problem is the EU will only intervene where that interference conflicts with their own world view. If I ran an NGO that claimed the climate was going to cool 2 degrees and we were entering an ice age it would be closed down in Europe. Not so the opposite view even though both might turn out to be wrong. Simply, one conflicts with the approved world view. 

As an arbiter of truth, do we really trust people who get paid €350,000 a year (and then for life after they retire) just to drink wine. Do we think they have our best interests at heart? Would those people pursue policies to protect themselves first? I think they would. 

Europe is slipping into authoritarianism. They rely on the fact that nobody actually reads these horrific documents. It’s breathtaking stuff just lobbed in a press-release.  

Further Information

Our October 2025 report to investors can be found here.

📚️ PDF⏳️ 5 min 📖 4

Still nothing

Gleefully posted this week by Mr “software is eating the world” Marc Andreessen. He first wrote that line in 2011 in an article for the Wall Street Journal. It does not appear to be behind the paywall, so you can read it and weep (like I did) that you didn’t pay more attention to it 14 years ago. Apple, the bubble of the time, at 15.2x PE and has done 25x in value since.

Sounds slightly familiar. Anyway, despite the accuracy of his claim, in terms of the amount of GDP represented by software sales, it’s still tiny but recently pivoted upward. Our internal software spend has risen because of subscriptions to OpenAI, Anthropic and Grok. The return on that investment of a few hundred dollars a month is enormous too, surely better than anything else we spend money on. 

Andreessen was way ahead of his time in 2011 but I can’t see that graph stopping its trajectory of heading north at an increasing rate. He will be a lot more right in 2035 than he is in 2025 and even more so than he was in 2011. 

After all, “Everything’s Computer”.

The Mirage

Some new products in the land of fiat currency this week. They all tell the same tale, the value of fiat currency collapses far more quickly than anyone reports or realises. The whole story (and it is a story) of economic growth, rising real wages, is in many cases, simply a mirage. 

“Accessible to everyone” via 15 year car loans? I believe it is fair to say we have become extremely good at the manufacture of excellent, reliable vehicles. The price of cars over the last 30 years should have collapsed towards the x-axis if all the things we have been told are true, but they haven’t. For many Americans, and many in the Western world, they are prohibitively expensive. So, the U.S. is introducing a 15 year car loan. 

The average lifespan of a car is 12.5 years, unless you own a Toyota, in which case it is 250 years. Is the American Dream really one of owning a car in 15 years which is by then worth zero? 

In the same week we got 50 year mortgages! Apparently, they will lower monthly payments. In our example below, monthly payments drop by $270. The downside being the term and the monumental difference in overall interest cost for the life of the loan. 

Will it make it cheaper though? In theory, even if the buyer is 25 years old, are they going to be able to meet the payments at 75? Can a fixed 50 year interest rate possibly be as low as a 25 year rate? 

Yet, even though these products are on the face of it ridiculous. They aren’t. In reality you might be paying 6% but the nominal value of things is probably rising in fiat terms at over 10% - 12% every year. The 50 year mortgage might turn out to be the best currency short of all time. If fiat currency is as terrible as I think it is, then these products are a gift. 

Arguably these products are an offer to short the currency: “get ahead and short the currency for your whole life.” To which I respond, “Yes”. Yes, only because what other choice is there?

In Britain, a different kind of loan product is brewing, derived from energy prices. In five years the amount owed on energy bills has jumped from £1 billion to £4 billion. Clearly there are dual effects here, not just the general collapse in the value of currency but also in the supply of energy but still. You cannot fake energy and much is revealed in its price. I look forward to Britain releasing the “low interest energy mortgage”. 

Why is it that, with economic growth, technological growth and vastly more educated society, people cannot afford an electricity bill or a basic car and certainly not a home? Because fiat is a mirage. It’s a story and a giant fraud that lots of people are in on. They live warmly in its bosom. It suits nobody with influence to rock that boat. 

If you do have any issues, Australia’s banks are “here to help”

Commbank too.

The NAB. 

Help, it seems, is everywhere. That’s all part of the story of fiat though. Citizens! Don’t you understand? It helps you. 

A whole suite of new products then for the financialised parts of town to issue to everybody else. In reality it's a product for the old to issue to the young and the solution for young people is a simple one. Buy bitcoin. Keep buying it and then, one day simply turn around and say “pay me in bitcoin or I’m not doing it”. People laugh at me for saying it, they are bored of me saying it. I just hope they have some for when the day comes.

One thing is for sure. If you ask NAB, Commbank or Westpac to help you buy bitcoin. They will say “No”. 

I dream that one day the NAB calls and asks to buy some bitcoin from me. I will refer them to the help page on my website. There will be a picture of an attractive, happy family in a new home. There will be lots of links to click that go nowhere. It will be a mirage, a helpful one. 

Square

We used to get very excited when a payment processor adopted bitcoin. This week Square, the largest payment provider in the US (by number of merchants), added it. Flick a switch, accept bitcoin and receive bitcoin or USD.

Adoption matters. This, by its mere presence and simplicity, is going to help a lot. 

Cup week

I happened to look through past editions of MoneyBits to see if we had ever predicted the winner of the Melbourne Cup. Answer, no. In 2019 though we did write this in an edition called “Cup Week”. Scroll all the way to the bottom, we did pick a winner. Just not the Cup. 

One for the good guys

Another win for the good guys in Europe! A recent vote at the European Parliament now limits the amount that can be paid in cash to €10,000. Anything over €3,000 requires ID. It's not a huge change for most EU countries, it just standardises the limit. Any single cash transaction over the €10k mark will now be a criminal offence from 2027. 

For cryptocurrency transactions the rules are different though, ID will be required for transactions of €1,000 or more. The reason? There isn’t one. Just lower is better, that’s it. 

The idea, of course, is to prevent money laundering. Another huge strike against terrorism. Except the burden is on the 300 million Europeans who want to be left alone. They will now have to do stupid stuff like spray their passport all over the internet for no real reason. A massive admin burden that is really a win for terrorism. 

Has any terrorist ever done KYC? Do they show their driver’s license to their local arms dealer? Maybe they do. 

Anyway, here is an amusing story, that isn’t true, from an American in Europe. 

Euro-Trash

The tiresome explainers are back. The ECB left interest rates unchanged but explained that the Euro-area is struggling because of “tariffs, uncertainty and strong Euro”. I imagine that to be true but surely high energy costs, regulation and a collapsing economic incentive structure are bigger contributors. 

The problem is Germany. An economy destroyed by energy prices. The chart below shows the beneficiaries of German generosity over the course of the Euro’s life. The story of the Euro is one simply of Germany throwing €1 trillion at Portugal, Italy, Spain and Greece. 

The chart doesn’t lie. Now Germany has run out of money but Italy, Spain and Portugal have not stopped spending. They have growing deficits.  

Where will the money come from? The answer is simple, the ECB. Note the continual growth of the brown section at the bottom, ECB bond buying. More and more, and more. It will have special names, special acronyms to fit whatever emergency arises but it won’t really matter. It will be what it always was, a central bank monetising government debt.

Further Information

Our October 2025 report to investors can be found here.

📚️ PDF⏳️ 5 min 📖 6

Player Piano

I have not been helped in this analysis by reading Kurt Vonnegut’s 1952 book, Player Piano. It imagines a future dominated by machines. Paul Krugman, referring to the book, argued earlier this year that new technology shifts jobs rather than destroys them. I’m not so sure. Thinking machines are not the same as machines that make widgets and I would say the book is a better read now that it has been at any time in the last 70 years. 

That the S&P 500 and U.S. job openings diverge makes sense. Replacing a $500,000 engineer with a $500 subscription is a huge boost to productivity and profits in most industries, and it is happening. 

AI is the new workforce. Those on the leading edge of AI are also, not coincidentally, the ones who use it most, simply because they understand its power the most. Google, for example, 60%+ of its code is now written by AI. Amazon will release 30,000 management level staff before the end of the year, apparently not replacing them at all. Again, “not AI”: they just don’t need them anymore.

Advice? Get very good at controlling AI. Be totally immersed in it. Subscribe to this free newsletter that tells you pretty much everything that happened in AI yesterday. Read it every day. Click every link. Join every Discord. In three months time you will know about as much as anyone. 

In the book, people separate (or rather are separated) into groups. Those that control and design the machines. Next, the Reeks and Wrecks or “Reclamation and Re-construction Corps” a government works program. Finally, the army. 

Suffice to say, being a member of the first group looked preferable to me, albeit I'm sure that is not the intended takeaway of the novel. 

A global force

Andreessen Horowitz’s State of Crypto report landed this week. It is generally rather insightful. It points out the dominant force that stablecoins have become. 

The headline $46T is unadjusted; $9T (adjusted for financial flows) feels closer to the mark. Still huge. 

The global influence though really derives from the underlying treasury holdings. Tether alone now exceeds Germany in terms of its influence as an American creditor. If you want economic influence, holding nation state levels of American bonds and being a continual buyer is a very good way of doing it. Once the GENIUS act gets going, you can expect stable coins to jump into the top five on this list. 

A Letter

A letter from the UK House of Lords. The Lords are concerned that American tech companies are not taking Britain’s “Online Safety Act” seriously enough. Apparently, platforms are not “quaking in their boots”. 

Indeed. 

Why? Because they don’t really have a leg to stand on. If some moron on Facebook wants to post something stupid it is a matter for them, I suppose. Not really a matter for Facebook or the House of Lords but they seem to be under the understanding that they can control the distribution mechanism of the internet via American tech companies. 

It highlights something more interesting though. In last week's earnings surge, NVIDIA rocketed to 2x the value of Canada's GDP. Even on an earnings basis, Facebook has larger profits after tax than the GDP of Wales. Less impressive but a more like-for-like comparison. 

The fact is, that the US tech companies do have more power than most nation states, they also have far better distribution. They can access people in a way that government propaganda cannot. Are they worried when Britain fines them? No. What happens if Google refuses to pay a fine? Perhaps the government would respond by telling them that their services in Britain are no longer required. That would immediately result in the British economy collapsing in a heap. They are totally reliant on American tech. The threats are totally meaningless.  

The day draws near when one of these companies just says “if you want the money come and collect it yourself”. 

The letter from Baroness Keeley went on:

What an extraordinary way to sign off. Oh and by the way we’d love to know what everyone is using VPNs for, please make sure you provide that to us as well.

If that is not a gross invasion of privacy, what is?  In unrelated news, if you haven’t watched this film, you really should.

$100k (again)

This was May, in which I referred to February….in which I referred to December (2024).

Now in November, and here we are again

Bitcoin dipped below $100k this week. If anything can be said for this visit it's that the day has finally arrived when $100k is frustrating and disappointing. 

Progress, then.  

Euro-Trash

In France it costs an employer €95,300 in order to pay a gross salary of €60,000. The employee takes home €39,000. The burden of the state is simply huge. 

In the earlier analysis of why it is very difficult to find employment, at least well paid employment, this is one of the answers. The cost of employing anyone is exorbitantly expensive. 

Not only are the additional costs in France high, the basic minimum wage cost is also huge. The next chart is rather misleading because the full-time median salary is a lot higher in the US than everywhere else. The fact that it is rising is causing the minimum wage to fall as a percentage. It is extraordinary though that the minimum wage in the US is under 30% of the average wage while it is over 60% in the UK and France. Where’s the incentive to do better? 

In the UK there are many tax cliffs which penalise people as their pay rises. As you approach £50,000 child benefits fall away. In the 23-24 tax year anyone earning £50-£60k with three children paid a 70% marginal tax rate. For two children 60%, for one child 55% (this has since been reduced by 5% in each category).

It gets bad again as you approach £100k and the personal allowance falls away. In the twilight zone of £100k-£115k you are back up to 60% tax. Even more absurdly, if you are a two income household both earning £99k, then you are considered less well off than a single income household on £100k. If you have three children, chances are someone is at home with them. The UK absolutely demolishes large families with one person earning. 

The whole song and dance though is rearranging deckchairs on the Titanic. Employers have many options now rather than employing people, those options get better every month. They get orders of magnitude better every year. Soon, tax brackets won’t matter that much at all.

As the French and British governments wade through their ugly budget process they seem totally oblivious to the steam train heading in their direction. They move tax bands, subsidise child care, ‘tax the rich’, whatever. Near-free employment in the form of AI is here. All of it, American and Chinese owned.   

Further Information

Our October 2025 report to investors can be found here.

📚️ PDF⏳️ 6min 📖 7

Haircut

I had not fully appreciated the impact of synthetic diamonds on the wholesale diamond price. My barber, an expert on many topics, told me about it. Down almost 50% from their covid peak and falling all the time. I did a bit of digging and found this McKinsey Report on the state of the diamond market. 

In short, things look bleak. De Beers owner, Anglo American, has taken consecutive write-downs on its holding. $3.5 billion so far, valuing De Beers at $4.9 billion. It’s for sale too if you would like to buy it. You can bid against the government of Angola, who submitted their proposal this week. 

Synthetic diamonds themselves are old. General Electric were making them in 1954 but the breakthrough to jewellery quality did not arrive until the late 2010’s. Even then, the process was quite expensive and consumers still had a preference for the “real thing”. 

Unfortunately for the diamond market, lab grown diamonds are the real thing. The chemical composition of a lab-grown diamond, its atoms, its physical properties (hardness amongst others) is identical. They are diamonds. They meet the Federal definition of a diamond in the US (the largest market). 

“A diamond is a mineral consisting essentially of pure carbon crystallized in the isometric system. It is found in many colours. Its hardness is 10; its specific gravity is approximately 3.52; and it has a refractive index of 2.42.”

A synthetic diamond meets this definition as much as a “natural” one. The only requirement for selling them is that they do not masquerade as natural diamonds. Aside from that, synthetic diamonds have many advantages. They have almost no imperfections, so arguably are better, they also don’t require small children to drown in mud collecting them.

The cost of making synthetic diamonds has fallen 98% over a decade and keeps falling which does not bode well for the wholesale price. Obviously very famous diamonds, with very famous former owners, will likely keep their value. As for the rest of them, they are heading to zero, which is why Anglo American is doing its absolute best to dump the thing. 

Seeking an explanation for this phenomenon, I was told “they were scarce and now they aren’t, and that’s that”.

Incidentally, in my ignorance, I looked up whether the same could be done with gold. GPT: “No. Gold is an element, diamonds are a crystal”.

En France

France has proposed global taxation for its citizens in its 2026 budget. Any French citizen whose income exceeds five times the annual social security ceiling (approximately €235,500 in 2025) and lives in a country with an income tax rate 40% lower than that of France will be required to pay French tax. 

In fact, this is not as penal as it could be. In the US this has pretty much been the rule since the beginning. There are no exemptions either other than a small threshold for overseas income. The French, despite the headlines, have stepped quite gently into this but as time goes by no doubt its reach will be extended. 

In the US, the capability of a government to tax global income was challenged in the early part of the last century. The Supreme Court ruled as follows in 1924:

“The government, by its very nature, benefits the citizen and his property wherever found, and therefore has the right to tax him.”

As arguments go, it isn’t a bad one. 

Tax is the price of citizenship. Most likely if you don’t believe in tax you don’t really believe in citizenship either. The distinction here is between, where you live ‘residency’ and which passport you hold, ‘citizenship’. Almost all countries tax people on residency, very few (other than the US) tax on citizenship.

There is a wider dynamic here. Countries like the UAE with their very low rates of taxation have attracted hundreds of thousands of overseas citizens in the last decade. For example, 240,000 British nationals now live there. It doesn’t sound like a lot, but of the UK’s population, the workforce is 34 million, about half the population. Of that population, only 7-8 million are aged 18-35. That is almost exclusively the age group that has emigrated to the UAE, nearly 3% of the prime-aged working population. 

Governments might then consider it is reasonable to take action to prevent this from happening 

There are two ways international taxation can go. The UAE has taken the approach of attracting people with low tax. Other countries could also lower their taxes and make their country more attractive to capital in response, but almost nowhere has that happened. It appears the equalisation of global tax rates will happen upward, not downward, and via citizenship taxes. 

People and capital are now far more mobile than they ever were. As a consequence tax law is likely to change too. It is quite an easy one for politicians because the overseas citizens are much less likely to vote because of the admin pain of doing so. There is also very limited sympathy for expats amongst those left behind. If it doesn’t lose votes and it does raise money, there’s a good chance it happens. 

It remains a radical policy though. Wherever you go, whatever you do, whenever you do it; you have to pay us. Forever. 

JP Morgan

Before 2025 is done Bloomberg reports that JP Morgan will begin accepting Bitcoin and Ethereum as loan collateral. At this stage ‘institutional clients only’, but as time rolls on this should extend to everyone.

The historic Dimon quotes are there for this reason. You have to win the argument. It's no good saying “bitcoin this, bitcoin that” and it's just a story that means nothing. The point of the story, the point really of this column is to win the argument and when you win the argument the pendulum moves.

• we got Bitcoin ETFs

• we got stablecoin regulation

• we will get bitcoin backed loans

In fairness to Jamie Dimon, as the pendulum has shifted he has launched products to fit the market.

The collateral designation will make a huge difference because it simply removes sell pressure. One by one the dominoes keep falling but the argument will continue. 

I have wondered when the argument will be finally won. It will be when the government insists I pay for their services in bitcoin. 

The end of QT

Since June 2022, the Federal Reserve has been running off its bond holdings each month. In essence it has simply done nothing and collected the cash on maturing bonds. $2 trillion, or thereabouts. In banker-speak it was “tightening”. In reality it was just good old doing nothing. 

The chart below is from the Fed website. Oddly, the y axis is in millions implying to the reader that the current balance sheet stands just above $6m. In fact (see footnote under x axis) it's millions of millions, so $6 trillion but nobody should quibble about a few orders of magnitude. Why not label the axis 6T instead of 6M?

The new Fed policy from 1 December will be to reinvest the proceeds of maturing bonds in …  bonds. Which they describe as a ‘neutral’ policy. Arguably, the sit-back-and-do-nothing was neutral and this new policy is anything but. 

Years back (2012), the Federal Reserve Chairman at the time (Ben Bernanke) explained why the policy of Quantitative Easing is not in fact the monetisation of debt. It relies on the fact that it is temporary and eventually the Fed just lets the bonds mature or sells them. 

It's been 14 years since he said that. In that time the balance sheet doubled in size. In one month's time, the Fed will be buying at $5 billion/month again.  

Euro-Trash

AI Factories! Correct, the European Union has hit back at American dominance and launched its AI factories. As a European citizen you can log in and benefit from Europe’s pool of GPUs to help with your research project or start up. 

Unfortunately, the internet did a deeper dive and all is not what it seems with Euro-AI. The largest data centre is in the Czech Republic. It houses mostly CPUs (which are basically useless for AI). It does have a few NVIDIA chips but it turns out that Elon Musk’s xAI alone has 800x more GPU capacity than the largest Euro option (he also managed to build that in 90 days). Assuming the other data centres are the same size (which they aren’t) this would imply about 1,500 GPUs in the EU “factory cluster” compared to America’s currently active 750,000 GPUs. 500 times smaller. 

For those that do bother to try and use the Factory you need to be ‘pre-registered’ but registration closed in 2020! Not a joke, that’s when the Horizon program closed off applications. 

New applications can be made via the AI Playground. 

Specifically you need to be careful which category you apply in because the allocations of compute differ for each and your specific project will be assessed based on its merits. No real guidance on how this works you just have to guess I think. 

It’s insane. Having spent a few minutes navigating this soup of websites (the German one, the Greek one), there are 20 of them, it does make you wonder. None grant access to AI, they all just end in a form submission.

The soonest you can get access is in “4 days”. If you do get access you won’t necessarily get any GPU allocation though. Firstly, because there isn’t any, and secondly because access has to be specifically approved based on the worthiness of your project. 

The money for all this is derived from the EU’s Horizon program, which has a budget of €95.5 billion. The internet was not terribly kind about the use of those funds. How many people are working on this I wonder? It’s a web of nothing. 

If you are European (or anyone actually), just go here and use Google AI Studio for free. 

Further Information

Our September 2025 report to investors can be found here.

📚️ _PDF⏳️ 6 min 📖 6

Collateral

This evening, when you return home, someone is in your house. We will call her Jane. 

Jane claims it is her house and has always been her house and decides not to let you in. You call the police, who arrive and check their records (which are limited regarding ownership). There is something that says you live there and you produce your ID. 

Unfortunately, Jane also has ID, she has a litany of documents claiming ownership of the home. Title deeds (fake), utility bills (fake). Her children can be heard in the background in your living room. 

It’s not obvious what happens next. Jane is in the house and possession matters. When the police arrived, she must have had access (how will you prove it was unlawful? She is waving your spare keys at the officer). You are the person arriving after the fact. You are the person claiming ownership. Jane is actually physically in the house, her children are watching your television. 

Do the police evict the woman and her children and install you rightfully back where you should be? Unlikely. 

There will be a process and it will take time. 

Unlikely as this may seem it does happen. Not so much in Australia, but far more prevalent in Europe. The point being, that when it comes to physical property it is very hard (and time consuming) to prove ownership. Much of the legal system and financial regulation is designed to do exactly that. 

Difficulties with the ownership issue are far more prevalent in lending markets. The American market wobbled late last week on the back of two regional banks reporting some bad loans (very bad in fact). 

In effect, the borrower has allegedly pledged the collateral twice (perhaps more). Now they have gone belly up and the bank has called the loan only to find that Jane is in the house with her children.  

The issue of collateral is very real in banking because it is difficult to prevent this kind of fraud. In normal circumstances one can look up quite simply if a property is mortgaged, but that assumes the borrower is playing by the rules. 

It is for this reason that the best collateral would enable the lender to verify that they are the sole beneficiary of the collateral. That is exactly what bitcoin does. Once a bank is given the private keys by the client, there is no way for any other person to physically claim the collateral. They could make a legal claim but possession 100% remains with the holder of the private keys. You cannot squat on a bitcoin, you cannot transfer or pledge it more than once. 

This is exactly the reason that I believe it will be cheaper to borrow against bitcoin than anything else in the next 10 years. For a long time bitcoin-backed loans had 15%+ interest rates. Now you can have them for less than 5% and I expect that to fall further. It is pure collateral in a way that almost nothing else can claim to be. 

Prediction markets

Prediction markets (which we covered in the U.S. election) are back to the peaks of November volume largely due to the new American football season. The interfaces are simple, the betting is simple and of course cryptocurrency deposits are the order of the day. 

US$2 billion in a week is a lot. For comparison Australia’s largest tote pool had turnover A$4.2 billion on thoroughbred racing in the whole of 2024, a number that drops all the time. Not that it matters, we join elite company in banning the new products with our close friends in Cuba, Iran, North Korea and Russia (among many others I should add). 

The timing here is interesting. At last week's shareholder meeting the TAB’s new CEO announced that the Australian Tote Pools will be merging soon (before June next year), declaring that it will be “Good for the industry, Good for punters and Good for the TAB”. As a (very) minor shareholder I certainly hope so, but I’m not hopeful.  

Looking at Sunday’s NFL game. 

POLYMARKET

TAB

No need to get too technical here but the margin taken in the market by Polymarket is 1%, by TAB, it’s 5%. Five times as expensive and banned in Australia because it's good for you?

The reality of new technology is that it unlocks value. Normally because of efficiencies, but that often means (or requires) that there is a loser. There are lots of reasons why the local provider is more expensive, one of them is the amount of tax they pay. In the case of the TAB it is undeniably huge and as a percentage of revenue would be among the highest of any company in Australia. 

Still, the product is the product and in America it’s ⅕ of the price. One might legitimately ask, how that is sustainable?  

One month to go

One month now until one of the most important UK budgets in peace time history.  The issues are significant with a £30 billion gap between receipts and spending (1% of GDP). Most of the go-to fillers have already been raided. National insurance is up for everyone already, taxes are as high as they can go without receipts dropping off and all billionaires have successfully been chased away to the UAE.

The government also had an election pledge not to increase VAT (an already eye-watering 20%) so there isn’t much left to go at. 

The chosen target? Doctors, lawyers, accountants. There won’t be much sympathy for them electorally which is probably why they are in the firing line. One of the foundation sources of the UK’s more recent success though is these people. In the 80’s and 90’s London was the place to do deals because the Magic Circle law forms were the best. The accountants were the most innovative and capital was drawn to London because of the non-dom rules. In short lots of very clever people and very rich people mingled in the City and did stuff. If you were building a country you might actually target having lots of clever and rich people doing stuff, you might even dare to celebrate it. 

Gradually though, the UK government is creeping down the value chain. The people who wanted the work done have been scared away, their capital has left with them. Now those that actually did the work are left with the bill. 

America’s Ambassador to the UK has some better ideas this week. 

In the madness of the current UK policy settings the response to this in the upcoming budget is that the government plans to cut the rate of VAT on energy bills from 5% to 0%. Thereby cutting bills 5%. No acknowledgement at all that supply is the issue; just another stupid giveaway that makes the hole deeper.

And for what? For this. 

Nobody uses it

“Nobody uses bitcoin”. But honestly, how would you know? 

If you are reading this you most likely live in one of the richest countries in the world. You are likely moderately subjugated by a benign government (most of the time) which takes only 45% of your money. You enjoy a robust financial system. Your Australian or US dollars aren’t going to be confiscated anytime soon and it's unlikely their value will fluctuate that much on a daily basis. Over the course of a decade their value halves, and you can manage that (by just holding hard assets).

This lady, Roya Mahboob, is from Afghanistan and runs the Digital Citizen Fund. Since the return of the Taliban, most women in Afghanistan have been frozen out of the financial system, they are not permitted to open bank accounts etc. and cannot work. In an interview this week she explained the role of bitcoin in overcoming the mass debanking of women in the country.

Afghanistan, one of the most adversarial environments one could find. They use bitcoin.  This email from Satoshi Nakamoto explains why. 

Peer to Peer networks do survive in such environments. Tor and Gnutella, which most people have never heard of or used, continue to operate successfully some 16 years after his email. As does Bitcoin. 

Euro-Trash

I am struck by something about Agent Lagarde. The nuance in the language used by the ECB is often repeated, everything is a compliment but, by degrees. We can discern something from the degree of compliment. Much like picking through the verbiage of the FOMC minutes. 

If Christine genuinely likes you, she is “delighted” and you are a “good friend”. This is reserved only for those she is genuinely close to. I have seen it used for Draghi, Yellen and very few others. It is the hen’s teeth of Lagardisms.  

 Next in line. This time you are “a friend”. Still delighted but not a good friend. The smile in this case is less genuine. Nonetheless, if this ever happens to you, I would consider everything is good but you won’t be having Christmas dinner chez Lagarde.

“Pleased”. If Christine is “pleased”, she is anything but. At the time of this meeting, Egypt's economic reforms were not going as well as the IMF had hoped. Nonetheless, the photo shows that Christine is engaged in the meeting.  

Finally we have this. “Pleasure”. This week it was Jim Chalmers turn to be withered by the ‘compliment’. Apparently, the discussion about geopolitical developments was “good”. The sort of thing a teacher writes on your homework. 

I put together this handy ready reckoner for those of you who might meet Christine in future so you can immediately interpret her body language. The Jim Chalmers meeting was one of those rare occasions where Christine got it right. 

Further Information

Our September 2025 report to investors can be found here.

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Still important

This was rather unhelpful on a Saturday morning. It precipitated one of the biggest liquidation cascades seen across this sector. The numbers are variously exotic but it is certain that billions of dollars of leveraged positions were wiped out. For scale, it was 10x the size of the FTX wipe-out. 

Shortly thereafter, prices recovered and we are now pretty much where we were 10 days ago. That is only true of course for those that don’t use leverage. The vast majority of the damage was leveraged positions being taken out; some of the smaller tokens dropped over 50% on Saturday morning. Irrespective of your collateral that would be sufficient to take almost any leveraged trade to zero. 

None of this is new of course. Back in 2019 we wrote this in an investor update which is still true despite the industry being 10x as large. 

In a new investment sector like this, liquidity is key. New assets launch all the time and return spectacular results but there is very little volume, making buying and selling at scale extremely difficult and risky. We operate with strict liquidity conditions such that we disqualify coins where liquidity is low relative to the major index component, bitcoin. This can mean we miss strong rallies in smaller coins but as you can see from the overall performance for the year versus the base index, it works. The top 30 single day gains all went to assets other than bitcoin in the last 12 months, for example Bitcoin Cash, gained 54% in a single day on December 15, 2018 but is down 44% for the year.

These sorts of market moves are likely to get bigger as time goes on and the industry grows in size. The fact that crypto markets trade all weekend is a huge opportunity for well financed traders to exploit thin liquidity. “Record liquidations" isn’t a headline anyone wants but it’s true because the industry is growing so fast, so that headline will keep repeating. With growth comes all the attendant drama of get-rich quick schemes. 

Hold the best assets for the longest time and leave it at that. 

Joule

It’s odd that this opinion is controversial. Nobody wants to admit (yet) just how much energy is going to be required to continue the growth in AI. The country with the largest energy capacity is going to win. It's pretty much as simple as that but building that capacity is not as simple as printing the money to do it. 

As Elon points out here. That is the invention at the heart of Bitcoin “Proof of Work”, to mine bitcoin you have to prove that you have used the energy through computation. 

Proximity to energy is going to be the primary driver of national wealth. Arguably it always has been - Saudi Arabia, Norway, United States - dare I say it, Australia. That reality is much better understood in some parts of the world than others. 

In September the World Nuclear Association welcomed its newest member, Microsoft. Microsoft made a deal last year to reopen Three Mile Island, the US nuclear plant in Pennsylvania. A reopening that is now a year ahead of schedule. Not just Three Mile Island, the Palisades plant in Michigan which was turned off in 2022 is now operational again too. They are all going to feed data centres. 

Australia is heading down a different path but at least we might be able to sell a bit of uranium to countries that understand the Kardashev scale.

A lot of things are going to manifest in energy decisions in the next decade. Precisely for Elon’s reason “you can’t fake energy” the decisions that government’s make will be very important because it will take decades to correct them if they are wrong. The basic strategy ought to be “we will have as much of it as possible”. From there work back to how we make sure it's clean and doesn’t kill us. At present our settings appear to be “let’s just have less of it so it doesn’t kill us”.

This is Australia’s energy dashboard on Thursday morning. Wholesale energy price, negative everywhere. Super-negative in our most ‘net-zero like’ state South Australia. The reason this doesn’t reflect in your bills is because all the old school generation is still running in case it gets cloudy or the wind stops. Lucky you! you get to pay twice. 

This is before Australia’s massive renewables build-out. We are going to get enormously more amounts of power during the day from both wind and solar, and do what with it? 

If you want a wealthy country that can afford the sorts of advanced technologies and comforts people want you need a lot of it. What you don’t want to do is produce lots of it and then for whatever reasons decide you don’t want to use it, or can’t use it because it’s intermittent. 

As far as money itself goes, the perfect money was and always will be the joule. Currently only one thing in the world currently comes close. Thank you, Elon Musk, for the reminder. 

Luxembourg

Luxembourg has become the first European sovereign wealth fund to invest in Bitcoin ETFs. I was relating this to someone earlier in the week and they pointed out that Norway did so a few years ago. Norway however is not in the European Union (they have had referendums on it in 1972 and again in 1994. People voted no both times). So, Luxembourg takes the crown. 

Their sovereign fund name translates from French as the “Intergenerational Sovereign Wealth Fund”. It reported last month that it holds its $811 million portfolio as 57% bonds, 40% in equities, and 3% cash. So a 1% allocation to Bitcoin ETFs amounts to roughly $8 million.

It’s a nothingburger in the scheme of things. Perhaps more surprising is that if you were running an ‘intergenerational fund’ would you really have 60% in bonds and cash?  All told though, we have for many years discussed nation states buying bitcoin, now they do. Even in Europe. 

As an aside, the Norway comment did pique my interest (I’d forgotten they weren’t in the EU too). I mapped out Norwegian growth since the launch of the Euro versus the EU as a whole. Their economic growth is 25% larger than that of the EU despite the tough times they have had recently. Perhaps it would have been higher if they were a member but it does seem rather unlikely.

The theft of progress

Excitement then. The new MacBook is out with its M5 chip. Apple is promising all sorts of AI excellence from the device. I will not be buying one following the same promises on the iPhone 16 which delivered nothing at all. To Apple’s credit, my now seven year old MacBook Pro is still excellent (apart from the now noisy fan). 

The price of the base model in Australia will be A$2,499, exactly the same price as the base M4 model when it came out last year. So in theory, inflation in this category is zero. Sadly for us that is not how inflation is calculated. The new machine is better and so adjustments (known as a hedonic adjustment) are made to strip back its capabilities to those of its predecessor. The process is more complicated and more general than that because it is not done device by device but it certainly is done. 

In this case I gave GPT-5 the specs of the new machine and the old machine and asked it to estimate the size of the hedonic adjustment. 

13% is conservative. Probably not because lots of other things about the machine are superior like the battery and the screen for example. Both are not considered here but let’s be even more conservative and say it is 10% better. 

For the purposes of CPI then, computers are now 10% cheaper year over year. To you, the end user, they’re the same price. All buyers of this Apple product are indeed pretty happy that it is the same price as the predecessor for something so objectively better. You might say in that case that we absolutely do need the hedonic adjustment. From a pure stats perspective in fact, we do.

Come the next CPI announcement, the government will say “Inflation back in target range of 2-3%”. That will include all the hedonic adjustments across the economy. They are prevalent in tech and less so elsewhere but even so the progress that Apple makes and technologists around the world make is simply consumed by the government. 

We are conditioned that prices should always rise. Prices should always fall. Technological progress artificially masks the true extent of inflation in all modern economies. This is going to get even more acute with AI. As it gets integrated into existing technology, the hedonic adjustments are going to be huge because technically things are going to get so much better. Take x-rays, currently your friendly orthopaedic surgeon muses over the image and if the break is complex will consult with a colleague. Next year (now in fact),  Dr Bone can simply load it into a machine that has seen every x-ray in history and “assist with his opinion”. I’m using inverted commas because I would trust the machine's opinion more than the doctor’s.  

Explanations for why inflation is good from economists and politicians are generally laughable. The worst one I have seen is from the Bank of England 

“the 2% target helps everyone plan for the future. But if inflation is too low, or negative, then some people may put off spending because they expect prices to fall. Although lower prices sounds like a good thing, if everybody reduced their spending then companies could fail and people might lose their jobs.”

If prices fall, everyone will stop buying things, lose their jobs and die. 2% it is then. In fact, inflation in the UK is 4%, so it's twice as easy for everyone to plan over there.  

The technical adjustment is a huge and very little understood rip-off.

Euro-Trash

Interesting plan laid out in full here on the European Commission website earlier in the year which has now gone live. 

Strategic actions include 

• measures to attract global scientific talent and highly skilled professionals to 'Choose Europe'

• €600 million from Horizon Europe to enhance access to computational power for science, which will secure access to AI gigafactories for EU researchers and startups

• plans for doubling Horizon Europe's annual investments in AI to over €3 billion, including doubling funding for AI in science

• support for scientists to identify strategic data gaps and gather, curate, and integrate the datasets needed for AI in science

Of course the issue for Europe is that they do not have the “computational power for science”. They do not have the energy capacity for it either. In America they are raising 500x what Europe is about to spend and doing so from the private sector. There seems to be no acknowledgement in Europe that their AI objectives are completely at odds with their net zero goals. AI is going to use an unimaginable amount of energy that they don’t have. 

What is more, Europe has zero IP in this area; all the meaningful models are American or Chinese. Certainly the ones capable of making scientific breakthroughs are behind closed doors in Palo Alto. 

Frustratingly for Europe they did have a chance in all of this and wrecked it on day one. So much so in fact that Marc Andreessen never hesitates to remind the world of it. 

Why does he post this man's face? In perhaps one of the most memorable euro-tweets ever. Commissioner Breton announced that the EU had AI Regulation, nobody else did. He mocked America and China which was very odd because despite having regulations the EU had almost no AI companies. They had no IP in the area, and they still don’t. 

It was a monumental moment of stupidity almost two years ago. Since which date, Europe’s relative position in AI has gone backwards several orders of magnitude. 

Further Information

Our September 2025 report to investors can be found here.