Guy Swan (9:54)
The parent company's cash flows and savings to buy back trust units at the discounted price. This created a risk free arbitrage opportunity that allowed the Spicers to capture the spread between the market price of the trust and its underlying gold value. The landscape shifted dramatically after ETFs like GLD came to market in 2004. The advantage of closed end trusts eroded in much the same way GBTC did. When Bitcoin ETFs received SEC approval, gold trusts that had frequently traded at premiums to navigate began trading at persistent discounts to their nav, creating significant unitholder dissatisfaction. This vulnerability culminated in a historic hostile takeover by Sprott Incorporated in 2015. Sprott merged the Spicer assets into what is now the Sprott Physical Gold Trust Phys, and later acquired the original Central Fund of Canada. They've subsequently introduced a physical uranium trust sputtering and a copper trust cop. We'll explore Sprott Inc. In greater detail in an upcoming series about the multiflation method. Parallels to the 1920s Investment trust mania Progress is cumulative in science and engineering, but cyclical in finance. Jim Grant Perhaps the most haunting precedent for the current Bitcoin treasury company mania is, however, comes from the 1920s. In the Great Crash 1929, J.K. galbraith traced part of the Great Depression's origins to the financial engineering innovations of the era, specifically newly formed investment entities called investment trusts and holding companies that parallel Bitcoin treasury companies in many ways. Investment trusts. As Galbraith observed in his account of the era during the Roaring Twenties common Stocks occupied a cultural position remarkably similar to Bitcoin and arguably the S and P today. They were viewed as the revolutionary investment of their era, and there was widespread belief that supply of stocks was too scarce to meet surging demand. In the 1920s, mutual funds were introduced under the name investment trusts. And like Bitcoin, treasury companies formed to capitalize on this scarcity. A major difference between modern mutual funds and these trusts was that the trusts were leveraged. Like Bitcoin Treasuries, they invested using borrowed money that was considered Safe because, like MicroStrategy, they issued preferreds and long term debt securities to the public to buy portfolios of stocks. Galbraith the most notable piece of speculative architecture of the late twenties, and the one by which, more than any other device, the public demand for common stocks was satisfied, was the investment trust. The investment trust did not promote new enterprises or enlarge old ones. It merely arranged that people could own stock in old companies through the medium of new ones, democratizing access to the next big thing. Both the 1920s investment trusts and today's Bitcoin treasury companies emerged to democratize access to exciting scarce assets that ordinary investors found intimidating or complex. In the 1920s, Wall street was widely perceived as a rigged game dominated by ultra wealthy insiders with monopolized information. Investment trusts promised to level the playing field for the flood of new middle class investors entering the market by offering professional management, instant diversification and simple access to the bull market through a single purchase. Even Keynes delegated his U.S. stock investing to professional trust managers, recognizing their superior grasp of American markets while continuing to manage UK stocks himself. Bitcoin treasury companies offer a strikingly similar value proposition today. While anyone can buy Bitcoin directly and custody it themselves, doing so requires navigating crypto exchanges, managing digital wallets and securing private keys, a learning curve many traditional investors find daunting or impossible due to regulatory constraints. Companies like MicroStrategy provide familiar regulatory wrappers that allow investors to gain Bitcoin exposure through ordinary stock purchases in their existing brokerage accounts. Investors are also buying into the perceived expertise of leaders like Michael Saylor, trusting them to handle the complexities of acquiring and storing large Bitcoin positions and presumably later deploying capital wisely post hyper Bitcoinization mnav during the 1920s. Like Bitcoin treasuries, the 1920s trusts had the added appeal of MNAV premiums, and that seemed to offer something for nothing. Just as Bitcoin treasury companies today boast of their MNAV and Bitcoin yield A key feature of the 1920s bubble was the tendency for investment trusts to trade at significant premiums to M Nav during their heyday. Galbraith the measure of this respect for financial genius was that the relation of the market value of the outstanding securities of the investment trusts to the value of the securities they owned. Normally, the securities of the trust were worth considerably more than the property it owned, sometimes even twice as much. There should be no ambiguity on this point. The only property of the investment trust was the common and preferred stocks, debentures, mortgages, bonds, and cash that it held. Often it had neither an office nor office furniture. The sponsoring firm ran the investment trust out of its own quarters. Yet had these securities all been sold on the market, the proceeds would invariably have been less and often much less than the current value of the outstanding securities of the investment company. The latter obviously had some claim to value that went well beyond the assets behind them. The magazine of Wall street recommended the following guidelines for selecting trusts. On September 21, 1929 shares of an investment company capitalized with common stock only and earning 10% net on invested capital might be fairly priced at 40% to 50% in excess of share liquidating value. If the past record of management indicates that it can average 20% or more on its funds, a price of 150% to 200% above liquidating value might be reasonable. To evaluate an investment trust common stock preceded by bonds or preferred stock, a simple rule is to add 30% to 100% or more, depending upon one's estimate of the management's worth, to the liquidating value of the investment company's total assets. As Brad DeLong and Schleifer noted about this so called investment advice, this recommendation, made only a month before the Great Crash, assumes as a matter of course that funds should be selling at large premia. Managers ability to pick stocks is thought to multiply the value of the fund by a factor ranging from 1.5 to 3. Moreover, investors are advised to chase the trend to load up on funds whose assets have shown good performance in the past on the theory that their managers are the best. The paragraph just quoted would seem eccentric in the post World War II period when funds have typically sold at discounts. Investment analysts trying to direct investors away from closed end mutual funds also wrote as if such funds sold at far above net asset value in the third quarter of 1929 and earlier. McNeil's financial service in Boston, for example, ran a series of large Advertisements in 1929 Issues of commerce and Finance asking in bold type are you paying $800 for General Electric when you buy investment trusts? These advertisements noted that investment trust stocks were in many instances selling for two or three times asset value. They are issued to the public and almost immediately quoted double or treble the issue price. MNAV Magic as with today's Bitcoin treasury companies, this persistent M NAV premium created a powerful financial engine for both the trusts and the underlying stocks they were buying. The ability to conduct immediately accretive share issuances. When a trust trades at a premium to its underlying stock values, it can issue new units at the inflated market price and instantly increase the NAV for its existing shareholders. This reflexive accretion mechanism created a self reinforcing feedback loop similar to today's Bitcoin leverage loop. The cycle worked as investor optimism drove a trust's price to an M NAV premium. The trust would issue new units at this premium price, which was immediately accretive to the NAV per share. The new capital raise was used to purchase more stocks, adding buying pressure to the overall market and increasing the value of the trust's own portfolio. The rising NAV and apparent success of the strategy further fueled investor optimism, widening the premium and allowing the cycle to repeat. Meanwhile, investors in the trusts and individual stocks amplified their exposure to a sure thing by using margin loans to leverage their positions, adding extra juice to the trade and further driving up NAVs and MVAVs for the trusts. Galbraith noted that this MNAV process allowed trusts to create an almost complete divorce of the volume of corporate securities outstanding from the volume of underlying corporate assets in existence as they could create a virtually infinite supply of their own shares to meet the public's insatiable demand. This dynamic was a core driver of the bubble's inflation and a key point of systemic fragility that would later prove catastrophic in the crash. Goldman Sachs Trading corporation as Proto BTC Treasury Co. Goldman Sachs Trading Corporation GSTC was perhaps the proto microstrategy of the day. Launched by the influential Goldman Sachs partner Waddell Ketchings in December 1928, it was at its inception the largest investment trust yet established. Boasting an initial capitalization of $100 million, its units, offered to the public at $104, was immediately oversubscribed and quickly soared in value, doubling to $226 within a short period and in trading at a massive premium to the underlying value of its stock holdings. Pyramiding Trusts the initial success of GSTC was not enough for Catchings to further amplify returns and Absorb the public's insatiable demand for scarce stocks, Goldman Sachs constructed a pyramid of investment trusts. This trusts within a trust pyramid structure was designed for maximum leverage, meaning that a small rise or drop in stock prices could trigger significant gains or losses. In Brad DeLong and Andre Schleifer's The Stock Market Bubble of 1929, evidence from closed end mutual funds. They noted, quote, if investment trust MNAV premia indeed reflect excessive investor optimism rather than skill at management, there will be a tendency for funds to pyramid on.
