RoR: Forum

Dean:

The reason that the existing EFTs have to be intervened by a manager is that the funds actually hold the underlying stocks comprising the index. There is no alternative ... the manager must adjust his holdings to comply with the index. If he didn't investors would know that the fund didn't match the index and they would value the fund, not on the value of the index, but of the holdings, and the value would necessarily drift to the value of the holdings.

The same is not true for a virtual index tracker. If there is a liquid market any significant deviations from the index (the value of which is observable by all in real time) would be taken advantage of by traders looking for a fast buck. What would cause the value of the virtual fund to drift? In which direction?

As soon as the Fed stopped pegging USD to gold and silver, USD's value floated away from the price of gold and people stopped trading it for its declared value.

Yes, because gold has value independent of the $US.

Sam

Post 21

Monday, June 6, 2011 - 12:38pm

Dean and Sam - I confess to being lost. I understand that t might not be worth your while to give me a primer course. But I wonder who else is (and is not) on track here.

I thought that I understood index funds, but clearly, I do not. So, I went back to the beginning with Wikipedia articles about the NYSE Index and working my way back.

Relevant to your exchanges here (I think), I found this:

"Some index ETFs invest 100% of their assets proportionately in the securities underlying an index, a manner of investing called "replication". Other index ETFs use "representative sampling", investing 80% to 95% of their assets in the securities of an underlying index and investing the remaining 5% to 20% of their assets in other holdings, such as futures, option and swap contracts, and securities not in the underlying index, that the fund's adviser believes will help the ETF to achieve its investment objective. For index ETFs that invest in indexes with thousands of underlying securities, some index ETFs employ "aggressive sampling" and invest in only a tiny percentage of the underlying securities
"Some index ETFs, known as leveraged ETFs or inverse ETFs, use investments in derivatives to seek a return that corresponds to a multiple of, or the inverse (opposite) of, the daily performance of the index."
http://en.wikipedia.org/wiki/Exchange-traded_fund

I understand that if the ETF has a transparent (known) market basket of stocks (or whatever), the ETF would sell for only exactly the value of the basket. However, EFTs offer certain marginal advantages, (especially regarding tax laws) because by buying and selling the Index, you are not actually trading in the stocks themselves, making many trades. Being traded continuously throughout the day, the price of the EFT will rise and fall a little bit versus the actual basket. I get that (I think).

But, given the quote above, I see Sam's point. As this becomes more abstracted, it matters little what the stocks actually do. As long as the Exchange makes good on bets, the numbers become abstractions.

To think of it in simple terms, right now the DJIA is at 12,084. Wanna pick a number for tomorrow's close? (To me, it looks like it's going down, but I don't think it will drop to 11,900. Moreover, I believe that it will not rise above 12,200.) If I am the house, I can take all bets. All I need is a "commission" (charge to you to place the bet), or a large enough pool that I am between the winners and losers. This is no different than betting on football: you have no control over the game - but you have a prediction into which you are willing to invest.

Commodities futures - and derivatives of them - are a similar abstraction.
Fundamentally, there is "stuff" behind the trades, gold soybeans, whatever, but no one really cares. The derivative is the product. So, Sam's Virtual EFT has potential.

(If I am so far off that response is painful, just say so. Thanks.)

Dean: As soon as the Fed stopped pegging USD to gold and silver, USD's value floated away from the price of gold and people stopped trading it for its declared value.
Sam: Yes, because gold has value independent of the $US. Sam

But the Hong Kong Dollar and Caribbean Dollar do not. They are pegged to the dollar by the local central (government) banks which will buy or sell USDs to keep the official rate. Even so, the rates fluctuate - and they allow that without intervention up to a point - because of demand from people who need the local currencies, tourists if no one else. I have bought and sold currencies at the airports - convenience, not investment - and if the central banks did not "intervene" others would still be there to buy and sell into the demands.

(Edited by Michael E. Marotta on 6/06, 12:50pm)

Post 22

Monday, June 6, 2011 - 1:38pm

Michael:

You are pretty much "in the money" in understanding what I am trying to communicate and you have dug up more information on the management of the ETFs than I have been privy to. To me it's only of peripheral interest how the managers actually control the tracking, but they all have to trade stocks, futures, or whatever to accomplish it. I've covered myself before for my relative naivety about some of these details.

I like your use of the word "abstractions" to describe my proposed derivatives-of-derivatives.

Brainstorming ...

The SEC would never sanction the virtual funds, so set up an exchange to trade these new funds in, say, the Cayman Islands, or some other off-shore haven that would allow it. Set up virtual funds for a whole lot of indices, such as the Dow Transport Index, Russell 2000 Index, NASDAQ Composite Index, etc. The list is very long. Because the virtual indices don't contain actual stocks there could be various currencies for each of the virtual funds. The funds contain cash only in the particular currency. No margin. No interest. No splitting. The price of the virtual index would be the value of the index itself, i.e. a virtual Dow Jones Industrial Average Index Fund would trade at, for example, $12,400 US per share. The virtual fund management would have to provide real-time streaming conversion of the US index to the currency of a non-$US fund.

The virtual funds would be able to out-perform all the existing ETFs because of lower operating costs and because there wouldn't have to be any currency conversions for foreign investors.The off-shore haven would garner much in banking activity.

Sam

I don't see how the topic of gold gets into this conversation.

Post 23

Tuesday, June 7, 2011 - 2:03pm

Freegold is the answer - Gold as savings, or hard money, with other currencies (of any kind people choose to accept) valued in relation to freegold (physical only).

See: http://fofoa.blogspot.com/

Best part of freegold is it will happen anyway and not require us to do anything to "make it happen" - already in the cards.

Post 24

Thursday, June 9, 2011 - 5:28am

As Gilda Radner would say, "Never mind." The reason that the price of the virtual fund would drift is that the value of the cash in the fund wouldn't match the index. A virtual manager would say, erroneously, "I could buy the underlying asset but I won't bother with the extra costs of jiggery-pokery and manipulation to match the value of the index." But suppose that all the stock holders of the virtual fund bought at a price of, say, 50 and there were no other buyers until the index hit 100 and then they all wanted to sell. There would only be enough cash to pay them 50 cents on the dollar.

Sam

Post 25

Thursday, June 9, 2011 - 5:13pm

Good news: Schumer hates it: http://www.techdirt.com/articles/20110605/22322814558/senator-schumer-says-bitcoin-is-money-laundering.shtml

Post 26

Sunday, June 12, 2011 - 1:25pm

John Armaos is correct. My research, limited as it might be, corroborates his points. No one central agency controls the supply. There is a built-in growth curve and it has a built-in ceiling. The mechanisms are publicly known. See: http://en.wikipedia.org/wiki/Bitcoin and use your browser to find other resources.

By the way, Lew Rockwell hates it, too.

June 9, 2011
Bitcoin: Just Another Bogus Medium of Exchange
Posted by David Kramer on June 9, 2011 03:00 PM
http://www.lewrockwell.com/blog/lewrw/archives/89471.html

I'm sure by now many of you have heard about Bitcoin. The fact that it's called "virtual currency" gives you an idea about its actual value as a real medium of exchange. While many people who are touting it on Facebook are enamored with the fact that it was voluntarily created by the marketplace (i.e., is not forced down our throats by a private central bank), I'm afraid that those people are losing sight of how a real medium of exchange arises in a free market. A medium of exchange arises from something that had a material use/value in the market prior to becoming a medium of exchange, i.e., it was also a good being bartered for other goods and services. Over the centuries, the commodities gold and silver won out as the two most preferred mediums of exchange�with gold holding the number one position due to its being more scarce than silver.

David Kramer shows his ignorance as gold and silver had zero use before being accepted as money. Bronze and iron had uses. Silver did not. We all know that; and he should. "Money" was wheat or cows. Before silver and gold, shells were money - even today, the Chinese kanji for "money" is based on the ideogram for "cowery shell."

Post 27

Sunday, June 12, 2011 - 4:01pm

Michael,

I believe the gold was used in art, and in articles used in religious rituals and in jewelry -- all hundreds, if not thousands, of years before the first coin was minted.

Gold's first uses arose out of its intrinsic properties - its malleability, its resistance to corrosion and its natural beauty. Then with the passage of time and the awareness of its natural scarcity, it became a money.

If something like Bitcoins every becomes a successful medium of exchange, it will require time during which it establishes its value as a store of wealth, its stability of price, its ease of use, it's safeguards against counterfeiting, etc.

Gold had to establish its worth before it could be used as money. And its use in art and jewelry gave it the circulation and acceptance needed.

Post 28

Sunday, June 12, 2011 - 6:28pm

It's apparently not that anonymous. According to one of the articles within the article Peter linked:

http://gawker.com/5805928/the-underground-website-where-you-can-buy-any-drug-imaginable

Jeff Garzik, a member of the Bitcoin core development team, says in an email that bitcoin is not as anonymous as the denizens of Silk Road would like to believe. He explains that because all Bitcoin transactions are recorded in a public log, though the identities of all the parties are anonymous, law enforcement could use sophisticated network analysis techniques to parse the transaction flow and track down individual Bitcoin users.

"Attempting major illicit transactions with bitcoin, given existing statistical analysis techniques deployed in the field by law enforcement, is pretty damned dumb," he says.

There's also of course nothing stopping the Feds from conducting sting operations.

Post 29

Sunday, June 12, 2011 - 6:48pm

Steve, I understand and appreciate the very human need for decoration. If that were all that gold and silver were good for, then that might be enough to make them common commodity money, given their relative rarities.

I also hesitate to short change the early discoverers who over generations and centuries took us through ceramics to metallurgy. I have no threshhold for when the relative rarities of copper, iron, gold, silver, lead, tin were worked out, but clearly they were. So, I can accept that gold's seeming immutability would have given it religious meanings. Gold for the Sun; silver for the Moon. I get that.

But stones and feathers could do the same thing. In fact, I have magnetite jewelry myself, some other semi-curious things; and I have given my wife diamonds, rubies, and emeralds. They are just pretty stones, impure metal oxide crystals. We decorate with gold and silver, diamonds, etc., because that is all they are good for.

(The industrial age brought real uses for both precious metals and precious gems. I get that, too.)

SW: That will be nifty if that's the case - that it can't be cracked, hacked, or counterfeit - but I made a good living as a software developer and I'm not buying it at this point in time. I'll wait and see.
Paper money is "backed" by its purchasing power... it just isn't protected against inflation with an intrinsic worth, or with fixed-rate exchange rights for something that has intrinsic value.

A couple of months back, I completed an ANA certification in counterfeit and altered coins. There is a segment of the hobby that I do not support in any way that collects them. "Bogos" are the cute name given to Contemporary Counterfeit Bust Half Dollars, largely coins of the 1830s made mostly in the 1830s. (Fifty cents was a day's wages, like $100 now.) With gold coins, the incentives were even greater and the techniques more subtle. They could be hollowed out, filled with lead, and closed again. In fact, I was in a coin shop after an Engelhard 100 oz bar had been cut open and revealed to be plugged with lead.

There is always a way to cheat.

Like you, I have worked in computering - and still do - and like you I am not confident that I could tell a software gimmick quicker than I could tell an altered coin. But I do trust that after some arbitrary time, the method works or it is revealed not to.

I will let pass your claim that gold has "intrinsic" value. I know you meant "objective."

Post 30

Sunday, June 12, 2011 - 9:09pm

If BitCoins were effective in most ways as money, and started to become popular, this government would make it illegal or find a way to control it.

We need to change the politicians to get in more people whose understanding in this area is closer to Ron Paul's and to educate more voters about free enterprise in the monetary area. (Goal: Get the government out of the money/credit/interest business).

Post 31

Sunday, June 12, 2011 - 9:28pm

Steve they couldn't control it, that would be impossible unless they seized control of every ISP and shut down the internet. It's like saying the government can stop people from downloading pirated songs and movies. So far the effort to stop that has utterly failed. But they can scare people, set up sting operations, etc, but the more popular it would be the less likely any of those tactics would be very effective.

Post 32

Sunday, June 12, 2011 - 9:40pm

It would be easier to control BitCoins than gold. Gold can be moved from hand to hand (like illegal recreational drugs) while BitCoins requires internet servers, computers, network connections, download sites for the software, etc. More points for controlling. So, I wouldn't say that it was impossible to control, just that it would be somewhat difficult.

They control things today without having to put a cop at every point where the illegal activity could exist. They don't have to control every ISP (who wouldn't buck the law anyway). People can download pirated tunes because the government doesn't make a strong attempt to control pirated tunes - to control it would mean actually going after the people that have the servers that facilitate it. Easy to find them, easy to have laws that will permit prosecution, but they don't. Every time they do make an effort the effect is very noticeable. Controlling doesn't mean a total elimination of every single instance - just keep it down to a minority of the consumers. It is like a padlock - it just keeps honest people out... and that is enough for most uses.

But making Bitcoins illegal is all they would have to do, since money, by it's nature must be free to use in order to gain popularity. If the government went after it strongly, it would be dead.
(Edited by Steve Wolfer on 6/12, 9:48pm)

Post 33

Sunday, June 12, 2011 - 10:42pm

Steve:

People can download pirated tunes because the government doesn't make a strong attempt to control pirated tunes - to control it would mean actually going after the people that have the servers that facilitate it. Easy to find them, easy to have laws that will permit prosecution, but they don't.

I don't know what you're talking about, they have gone after the servers that facilitate it, search engines like Pirate Bay was targeted and others just pop up in their place or back-ups are created and hosted elsewhere.

Post 34

Sunday, June 12, 2011 - 11:53pm

What I've read, and what I hear from brother who is in the music business, is that they are very half-hearted in the prosecution of those involved. Our justice system has always been spotty in protecting intellectual property rights vigorously.

But if you are sure it can't be stopped and has all these advantages, then go for it... buy in large quantities, invest, get rich!

(Edited to correct a spelling error)

(Edited by Steve Wolfer on 6/13, 12:26pm)

Post 35

Monday, June 13, 2011 - 3:49am

A cellphone can be a server.

The government made gold "illegal" from 1933-1974, yet people still traded in it. Of course, the 18th Amendment and today's war on drugs speak to the same problem.

The problem is not that the government lacks enforcement powers. It is a principle of objective metaphysics that such a system ultimately cannot work.

They do have enough power to make your life difficult and ultimately impossible. But do not confuse the two contexts.

BTW, my "bother" is also in the music business,
but I don't drop the r no matter how much he annoys me. (:-)

(Edited by Michael E. Marotta on 6/13, 10:54am)

Post 36

Saturday, May 25, 2013 - 9:23am