Bob’s Journal for 10/12

Courts Are Overruling Regulators’ War Against Digital Currency Investments

The Securities and Exchange Commission (SEC) has been trying to limit investor access to digital currencies in recent years, but the courts are invalidating those actions.

Proposals to offer exchange-traded funds (ETFs) that invest directly in digital currencies, also known as cryptocurrencies, have been submitted to the Securities and Exchange Commission (SEC) by several investment firms in recent years. The proposals have been rejected.

A few years ago, the SEC approved ETFs offered by Grayscale Investments that invest in futures contracts on some digital currencies. But since then, the SEC has denied applications for ETFs that invest directly in the currencies instead of futures contracts on them.

A federal district court recently shot down the SEC’s denial of a Grayscale ETF that would purchase Bitcoin at spot prices, and the D.C. Circuit Court of Appeals recently upheld that ruling.

The appeals court said the SEC was wrong to reject Grayscale’s proposal for the spot bitcoin ETF and that the SEC was arbitrary in its decision.

The SEC didn’t make a reasonable explanation as to why it approved ETFs that invest in futures contracts but denied approval of ETFs that invest in the assets that underlie those futures contracts. The SEC had simply stated that direct investments in digital currencies are too risky and unsafe for retail investors.

In another case, the SEC lost an attempt to regulate the Ripple token.

Some observers say the SEC is denying approval of digital currency ETFs because it wants to regulate the digital currency exchanges. Until the exchanges agree to register with the SEC as regulated exchanges, it plans to deny approval of various digital currency investments. The SEC is in litigation with a couple of the exchanges over whether they are required to register.

The appeals court ruling doesn’t mean ETFs that invest directly in bitcoin and other digital currencies soon will be available. The SEC could appeal the ruling to the Supreme Court.

Or the SEC could decide not to appeal. Then, investment firms could submit proposals for the ETFs. The SEC still would have to review and approve the proposals. It could develop new reasons to deny the proposals or perhaps take some other action to delay approval.

China Isn’t Dumping the Dollar and Treasury Bonds

Recent events are highlighting the long-held concern that China is dumping its substantial holdings of U.S. Treasury bonds, causing interest rates to rise and potentially leading to a decline in the dollar.

There are some facts to support this fear.

China’s leaders have said they want the world to move away from using the dollar as the reserve currency, offering its currency, the yuan, as the logical alternative.

Data from the Fed also show that the value of U.S. Treasury securities held by China has steadily declined since about 2012.

The recent rise in U.S. interest rates and accompanying decline in the value of treasury bonds add to fears that China is dumping our bonds.

But other data indicate China isn’t reducing its Treasury bond holdings, according to Brad Stetser of the Council on Foreign Relations.

Stetser says China has moved some of its Treasury bond holdings to non-U.S. custodians, such as Belgium’s Euroclear.

Also, China shifted some of its reserves to loans made in its Belt and Road program. Almost all those loans were denominated in U.S. dollars.

The widely reported data also doesn’t include non-treasury assets held by China. These include agency mortgage securities and U.S. stocks. Stetser says those holdings are significant.

China also gives some of its assets to hedge funds and other third parties to manage, and those holdings don’t show up in the data.

Stetser has a lot more data at the link. He allows that there are lags in the available data, and it’s possible China made significant moves in the last few months. But overall, he believes China has mostly re-arranged its holdings by moving some treasuries into agency securities and transferring other treasuries to non-U.S. exchanges or third-party managers.

Overconfidence is Costly to Investors

Investors who self-assess their investment knowledge at high levels typically pay higher fees than other investors, according to a report from the Finra Foundation.

The foundation asked investors to assess their investment knowledge on a scale of 1 to 7. It also asked them the level of fees on their investments.

The answers revealed that investors who said they had higher levels of investment knowledge paid higher fees than investors who said they had limited investment knowledge.

The foundation also objectively tested the investment knowledge of some investors. The investors who had higher levels of investment knowledge based on the testing paid lower fees on average than other investors.

The objective test shows the importance of obtaining education before venturing into the markets alone.

A possible shortcoming in the study is that the level of fees paid was self-reported. It could be that the investors with lower-knowledge levels are reporting incorrect estimates of the fees.

It is also possible that investors who believe they have higher investment knowledge are comfortable moving out of low-cost index funds into higher-expense investments that potentially earn higher returns.

The Data

The Producer Price Index (PPI) increased 0.5% in September after climbing 0.7% in August. Over 12 months, the PPI is up 2.2% through September after rising 2.0% through August.

Excluding food and energy, the core PPI increased 0.3% in September and 0.2% in August. Over 12 months, the core PPI increased 2.7% through September, compared to a 2.5% boost through August.

Optimism declined a little among small business owners. The Small Business Optimism Index from the National Federation of Independent Business (NFIB) was 90.8 in September, compared to 91.3 in August.

That’s the second consecutive month the index declined and the lowest level in four months. The index hit a recent low of 89 in April.

Inflation and labor quality tied as the most important business problem reported by the owners. The percentage of business owners expecting better conditions in the next six months declined significantly.

Consumer credit outstanding declined at an annualized rate of 3.8% in August. Revolving credit (mostly credit cards) increased 13.9% but nonrevolving credit (mostly vehicle and student loans) declined by 9.8%.

There were 336,000 new jobs created in September, according to last week’s Employment Situation reports. The number of new jobs created in August was revised higher to 227,000.

September’s increase in the number of jobs was the highest in eight months. The unemployment rate remained at 3.8%.

Average hourly earnings increased 0.2% in September, the same rate as in August. Over 12 months, average hourly earnings increased 4.2% through September after jumping 4.3% through August.

New unemployment claims increased by 2,000 to 207,000 in the latest week.

Continuing claims, which lag a week behind new claims, decreased to 1.664 million from 1.665 million.

The Markets

The S&P 500 rose 3.07% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 2.26%. The Russell 2000 increased 2.82%. The All-Country World Index (excluding U.S. stocks) added 3.25%. Emerging market equities advanced 2.50%.

Long-term treasuries rose 1.88% for the week. Investment-grade bonds increased 1.74%. Treasury Inflation-Protected Securities (TIPS) added 0.96%. High-yield bonds gained 1.47%.

In the currency arena, the U.S. dollar declined 1.10%.

Energy-based commodities lost 2.02%. Broader-based commodities rose 0.28%. Gold gained 2.00%.

Bob’s News & Updates

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A recent five-star review of my book, “The New Rules of Retirement” on amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

If you’re interested in my books, check my amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.

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