#crypto

Waking up to a horror of our own creation

7196645E-A91E-4FB7-9E99-F44977216C98.jpeg

Some will say I am a pessimist. I’d prefer to be called an optimist with experience. At only age 16 (in 1987) I realized the destructive power financial markets had on the family home. Those memories were etched permanently. We weren’t homeless or singing for our supper but things sure weren’t like they use to be. It taught me much about risk and thinking all points of view rather than blindly following the crowd. That just because you were told something by authority it didn’t mean it was necessarily true. It was to critically assess everthing without question.

In 1999, as an industrials analyst in Europe during the raging tech bubble, we were as popular as a kick in the teeth. We were ignored for being old economy. That our stocks deserved to trade at deep discounts to the ‘new economy’ tech companies, no thanks to our relatively poor asset turnover and tepid growth rates. The truest sign of the impending collapse of the tech bubble actually came from sell-side tech analysts quitting their grossly overpaid investment bank salaries for optically eye-watering stock options at the very tech corporations they rated. So engrossed in the untold riches that awaited them they abandoned their judgement and ended up holding worthless scrip. Just like the people who bought a house at the peak of the bubble telling others at a dinner party how they got in ‘early’ and the boom was ahead of them, not behind.

It was so blindingly obvious that the tech bubble would collapse. Every five seconds a 21 year old with a computer had somehow found some internet miracle for a service we never knew we needed. The IPO gravy train was insane. One of my biggest clients said that he was seeing 5 new IPO opportunities every single day for months on end. Mobile phone retailers like Hikari Tsushin in Japan were trading at such ridiculous valuations that the CEO at the time lost himself in the euphoria and printed gold coin chocolates with ‘Target market cap: Y100 trillion.’ The train wreck was inevitable. Greed was a forgone conclusion.

So the tech bubble collapsed under the weight of reality which started the most reckless central bank policy prescriptions ever. Supposedly learning from the mistakes of the post bubble collapse in Japan, then Fed Chairman Alan Greenspan turned on the free money spigots. Instead of allowing the free market to adjust and cauterize the systemic imbalances, he threw caution to the wind and poured gasoline on a raging fire. Programs like ‘Keep America Rolling’ which tried to reboot the auto industry meant cheaper and longer lease loans kept sucking consumption forward. That has been the problem. We’ve been living at the expense of the future for nigh on two decades.

Back in 2001, many laughed me out of court for arguing Greenspan would go down in history as one of the most hated central bankers. At the time prevailing sentiment indeed made me look completely stupid. How could I, a stockbroker, know more than Alan Greenspan? It was not a matter of relative educations between me and the Fed Chairman, rather seeing clearly he was playing god with financial markets.  The Congressional Banking Committee hung off his every word like giddy teenagers with a crush on a pop idol. Ron Paul once set on Greenspan during one of the testimonies only to have the rest of the committee turn on him for embarrassing the newly knighted ‘Maestro.’ It was nauseating to watch. Times seemed too good so how dare Paul question a central bank chief who openly said, “I know you think you understand what you thought I said but I’m not sure you realize that what you heard is not what I meant.”

We all remember the horrors of the collapse of Lehman Brothers and the ensuing Global Financial Crisis (GFC) in September 2008. The nuclear implosions in credit markets had already begun well before this as mortgage defaults screamed. The 7 years of binge investment since the tech bubble collapse meant we never cleansed the wounds. We would undoubtedly be in far better shape had we taken the pain. Yet confusing products like CDOs and CDSs wound their way into the investment portfolios of local country towns in Australia. The punch bowl had duped even local hicks to think they were with the times as any other savvy investor. To turn that on its head, such was the snow job that people who had no business being involved in such investment products were dealing in it.

So Wall St was bailed out by Main St. Yet instead of learning the lessons of the tech bubble collapse and GFC our authorities doubled down on the madness that led to these problems in the first place. Central banks launched QE programs to buy toxic garbage and lower interest rates to get us dragging forward even more consumption. The printing presses were on full speed. Yet what have we bought?

Now we have exchange traded funds (ETFs). Super simple to understand products. While one needed a Field’s Medal in Mathematics to understand the calculations of a CDO or CDS, the ETF is child’s play. Sadly that will only create complacency. We have not really had a chance to see how robots trade in a proper downturn. ETFs follow markets, not lead them. So if the market sells off, the ETF is rapidly trying to keep up. Studies done on ETFs (especially leveraged products) in bear markets shows how they amplify market reactions not mitigate them. So expect to see robots add to the calamity.

Since GFC we’ve had the worst post recession recovery in history. We have asset bubbles in bonds, stocks and property. The Obama Administration doubled the debt pile of the previous 43 presidents in 8 years. Much of it was raised on a short term basis. This year alone, $1.5 trillion must be refinanced.  A total of $8.4 trillion must be refinanced inside the next 4 years. That excludes the funding required for current budget deficits which are growing despite a ‘growing economy’. That excludes the corporate refinancing schedule. Many companies went out of their way to laden the balance sheet in cheap debt. In the process the average corporate credit rating is at its worst levels in a decade. Which means in a market where credit markets are starting to price risk accordingly we also face a Fed openly saying it is tapering its balance sheet and the Chinese and Japanese looking to cut back on US Treasury purchases. Bond spreads like Libor-OIS are already reflecting that pain.

Then there is the tapped out consumer. Unemployment maybe at record lows, yet real wage growth does not appear to be keeping up. The number of people holding down more than one job continues to rebound. The quality of employment is terrible. Poverty continues to remain stubbornly high. There are still three times as many people on food stamps in the US than a decade ago – 41 million people. Public pension unfunded liabilities total $9 trillion. Credit card delinquencies at the sub prime end of town are  back at pre-crisis levels. We could go on and on. Things are terrible out there. Should we be in the least bit surprised that Trump won? Such is the plight of the silent majority, still delinquent after a decade. No wonder Roseanne appeals to so many.

A funny comment was sent by a dyed-in-the-wool Democrat, lambasting Trump on his trade policies. He criticized the fact that America had sold its soul for offshoring for decades. Indeed it had but queried that maybe he should be praising Trump for trying to reverse that tide, despite being so late to the party. Where were the other administrations trying to defend America all this time? Stunned silence.

Yet the trends are ominous. If we go back to the tech bubble IPO-a-thon example. We now have crowd funding and crypto currencies. To date we had 190 odd currencies to trade. Of that maybe a handful were liquid – $US, GBP, JPY, $A, Euro etc – yet we are presented with 1,000s of crypto currency choices. Apart from the numerous breaches, blow ups and cyber thefts to date, more and more of these ‘coins’ are awaiting the next fool to gamble away more in the hope of making a quick buck. Cryptos are backed by nothing other than greed. Yet it sort of proves that more believe that they are falling behind enough such they’re prepared to gamble on the biggest lottery in town. One crypto used Wikipedia as a source for its prospectus.

Yet the media remains engrossed on trying to prove whether the president had sex with a porn star a decade ago, genderless bathrooms, bashing the NRA, pushing for laws to curtail free speech, promoting climate change and covering up crime rather than look at reporting on what truly matters – the biggest financial collapse facing us in 90 years.

There is no ‘told you so’ in any of this. The same feelings in the bones of some 30 years ago are back as they were at the time of Greenspan and Lehman. This time can’t be avoided. We have borrowed too much, saved too little and all the while blissfully ignored the warning signs. The faith and confidence in authorities is evaporating. The failed experiment started by Greenspan is coming home to roost. This will be far worse than 1929. Take that to the bank, if it is still in operation because you won’t be concerned about the return on your money but the return of it!

Fasten your seatbelts!

5A83480F-6605-47C7-B259-AAD0B504ECD2.jpeg

The “Fasten your seatbelts” edition (March 6, 2018) of the High-Tech Strategist by Fred Hickey is best read with antidepressants or a stiff drink. To be honest I hadn’t seen a copy of this research for at least 5 years. Today I’ve read it three times hoping I haven’t missed or misread anything. It is well reasoned and well argued. I would even admit to there being confirmation bias on my side but it is compelling. Usually confirmation bias is a worrying sign although prevailing sentiment or group think, it isn’t!

Perhaps the scariest claim in his report is a survey that showed 75% of asset managers have not experienced the tech bubble collapse in 2000. So their only reference point is one where central banks manipulated the outcome in 2007/8. S&P fell around 56% peak to trough. I often like to say that an optimist is a pessimist with experience. A lot of experienced punters have quit the industry post Lehman’s collapse, hollowing out a lot of talent. That is not to disparage many of the modern day punters but it does experience is a hard teacher because one gets the test first and the lesson afterwards.

Hickey cites an interview with Paul Tudor Jones who said that the new Fed Chairman Powell has a situation not unlike “General George Custer before the battle of the Little Bighorn” (aka Custer’s Last Stand). He spoke of $1.5 trillion in US Treasuries requiring refinancing this year. CM wrote that $8.4 trillion required refinancing in 4 years. In any event, with the Fed tapering (i.e. selling their bonds) couple with China and Japan feeling less willing to step up to the plate he conservatively sees 10yr rates hit 3.75% (now 2.8%) and 30 years rise above 4.5%. Now if we tally the $65 trillion public, private and corporate (worst average credit ratings in a decade) debt load in America and overlay that with a rising interest rate market things will get nasty. Not to mention the $9 trillion shortfall in public pensions.

Perhaps the best statistic was the surge in the number of articles which contained ‘buy-the-dip’ to an all time record. Such lexicon is often used to explain away bad news. It is almost as useless as saying there were more sellers than buyers to explain away a market sell off. In any event closing one’s eyes is a strategy.

Hickey runs through the steps leading up to and during the bear market that followed the tech bubble collapse. It was utter carnage. Bell wether blue chips like Cisco fell 88% from the peak. Oracle -83%. Intel -82%. Sun Microsystems fell 96%.

To cut a long story short, assets (bonds, equities and property) are overvalued. The Bitcoin bubble and consequent collapse have stark warnings that he saw in 2000. He recommends Gold, Gold stocks (which he claims are selling at deeper discounts than the bear market bottom) Silver, index and stock put options (Apple, Tesla, NVidia & Amazon) and cash. Can’t say CM’s portfolio is too dissimilar.

As Hickey says, “fasten your seatbelts

Two of the worst possible combinations one can think of

3A80FECC-0F22-4FA1-836C-CA0C53815392.jpeg

From LivingOffset – “Global concern about climate change is growing rapidly. Five out of every 10 people now consider climate change to be a serious problem. In Chile and Peru the number is over 75%. Interestingly, 69% of Americans are concerned about global warming [if you believe HuffPost], despite their government’s position. There is no doubt demand for our offering is there, and like Airbnb, we can provide the means and the mechanism for easy participation. In just a few minutes ordinary people can start to make a real and meaningful difference.

In January 2017, IPSOS held a global poll asking what each country’s major problem was and climate change didn’t feature a mention.

As Europe and the US brave record snowfalls one couldn’t think of two more terrible combinations – a crypto-currency and a climate abatement cause. Apart from the fact that the prospectus cites Wikipedia to support its stats, it ignores the growing number of scientists admitting that climate change is little more than a multi trillion dollar rent seeking industry. As we’ve seen in recent years, many scientists and government bodies have been caught red handed with their hand in the till. Data has been manipulated to get a result. NOAA was subpoenaed by US Congress for fiddling the data ahead of the Paris Climate Accord. Australia’s Bureau of Meteorology has also been caught misrepresenting temperature records. The IPCC has made more climb downs from unchecked positions than one can count. It is the epitome of double standards given 50,000 pilgrims fly half way around the world to kneel at the altar of the COP climate change summits, belching so much of that dangerous CO2 we are warned about.

Even the language has changed – from global warming to climate change to climate disruption. All bases covered.

The one question that the alarmists can never answer – if the science is so settled, why do scientists feel so compelled to lie and corrupt data? Surely the data speaks for itself because it is so compelling on a stand alone basis. No need to brazenly commit data fraud. While many alarmists are happy to see evil banksters get hauled off to jail, have we seen any scientists face prison time for misleading the allocation of billions in taxpayer funds? Imagine if that was introduced? How quickly climate disruption would go away.

Apart from the completely bogus stats on ‘69% of Americans being concerned by global warming, SUV sales remain a solid staple in the US. In fact the most popular car in America is the Ford F-150 pick-up truck where customers rank ‘fuel economy’ #28 in terms of reasons they buy it. When Trump quit the Paris Accord, Rasmussen showed that most polled were for his move because sticking to teh deal just increased their cost burden. Wallets matter more than virtue signalling.

Let’s check reality of the climate game. 75% of the evil gas that helps plants grow are caused by 4 countries – America, China, India and Russia. Let’s tackle them one by one.

America. Well the commitment to the Accord was so flimsy to begin with, It was laced with out clauses such as being exempt from being sued for any environmental damage caused in the past or future. Obama decided to tick the box himself after lawyers breathed on the fine print – remember the US was the last to commit.

China. China, China, China. The commitment is so robust they don’t have any intention to get serious until 2030 (likely peak emissions). China has explicitly said it will raise the coal share of power to 15% by 2020 from 12% and this will keep climbing. China’s pollution problems have stuff all to do with global warming but public health however it can virtue signal under the banner of climate change mitigation and win brownie points.

India. The construction of 65 gigawatts worth of coal-burning generation is under way with an additional 178 gigawatts in the planning stages in India will mean they’ll not achieve Paris targets.

Russia’s commitment at Paris would have been more serious if drafted on a hotel napkin such was its lack of substance. 4 pages of nothing.

LivingOffset makes some grandiose claims of 128% returns by 2022 but put in its disclaimer,

There can be no assurance that LivingOffset’s investment objective will be achieved and investment results may vary substantially over time. Investment in LivingOffset is not intended to be a complete investment program for any investor. Prospective participants should carefully consider whether an investment is suitable for them in light of their circumstances and nancial resources.

Carbon offsets are a joke. In Australia, people can elect to have their electricity sourced from renewables only (by paying a premium) yet less than 3% choose to do so. Qantas offered carbon offsets when flying but the take up has been insignificant. Carbon offset calculators are so woefully inaccurate that the price paid to virtue signal can be drastically affected by load factors, aircraft type, head/tailwinds and delays to land.

In any event there are 190 odd currencies in the world and over 1,000 crypto currencies. Apart from the unregulated nature of these electronic coins, we’ve already seen how vulnerable ‘blockchain technology’ is and how easy it is to be hacked. Crypto is backed by greed. Recently a person was emptied of all their crypto at phone point. Once the transaction has been completed the ‘money’ is gone. So no need to break into a bank. Just rob you from your smartphone.

While the crypto currency trend continues, await harder nosed regulations, taxation and  restrictions that take the lustre off these coins. LivingOffset looks a very risky investment.  To some up LivingOffset – it is like asking someone else to quit smoking on your behalf. How do you benefit health wise?

Then again actions always speak louder than words. Aircraft travel is set double by 2035 according to IATA. Last time I looked, aircraft run on fossil fuels. Once again, peoples’s consumption habits are the best indicator of commitment to climate abatement.

Why buy a Rolls-Royce without a Rimowa??

764137F2-C48C-469D-9FB0-6A3F5848ABF6.jpeg

I guess even the some of well heeled are strapped for cash. Surely the pomp of being able to buy a Rolls-Royce is the theatrics of handing the dealer a Rimowa briefcase stuffed with crisp bank notes. The RR offer is a combination of a $10,000 special buyers support and 0.99% financing. Maybe RR realizes that its customers are probably punting bitcoin so need the extra leverage a 0.99% loan provides?

In the old days as an industrials analyst, I used to cover a stock called Ferretti which made ridiculously large motor yachts where the average price was $15 million +. When Asking the company how the tech-wreck internet bubble collapse would impact sales they responded “our customers do not experience recessions”. One wonders if RR are requiring discounted financing to shift product that costs as much as a house that perhaps their customers “do experience recessions

Time to “put” some eggs in this basket!

8247EFD3-B6AE-4CC5-B57C-954C532066AE.jpeg

In the everything bubble it is hard to find exposure to ‘relatively’ cheap things. Just a quick glance at the S&P500 index derivatives market one can see that ‘Put’ options (i.e. buying a put option gives the owner the right to sell at a particular strike price) prices are scraping the bottom of the barrel. While the above 2450 strike price (expires on 19 Jan 2018) seems a stretch for an S&P 500 Index showing 2662 (8.7% higher than the above put option) listening to outgoing Fed Chair Janet Yellen in the December FOMC press conference tells us that group think is alive and kicking. At least she admitted that,

The stock market has gone up a great deal this year…asset valuations are elevated….We see ratios in the high end of historical ranges…but Economists are not great at knowing what the right valuations are…we don’t have a terrific track record

Whatever the ultimate timing is of the impending pullback in asset bubbles, the downside will be extra ugly, especially now with so much market behaviour driven by robots with algorithms that have not been thoroughly tested in bear markets.  Time to own some longer dated put options me thinks. #MPGA (Make puts great again)

Bitcoin Exchange looks to litigation to shut critics up

24356639-9178-4D8A-BDBB-042A2BF649AE.jpeg

As Bitcoin surged through $16,000 it’s largest exchange Bitfinex has declared it will take legal action against critics. Sounds like it is run by millennials to have to threaten those who disagree with them. In the following article Bitfinex attorneys said,

To date, every claim made by these bad actors has been patently false and made simply to agitate the cryptocurrency ecosystem. As a result, Bitfinex has decided to assert all of its legal rights and remedies against this agitator and his associates.

However it seems an independent audit over the USD reserve status of Tether, which Bitfinex is involved with has not been conducted as promised. Seems a pretty binary question. So threatening to sue a blogger before facts have been laid bare does seem rather strange. Indeed wouldn’t an audit put to bed fears of a rigged system?

Indeed if an exchange goes down and people wanted the cash equivalent for their coins then wouldn’t the Ponzi scheme be revealed?

As Bitcoin soared past $16,000 overnight it is hard not to feel bewildered but at least there is comfort in knowing dissenting voices will be sued.

Just as a side note. As a business if I accepted bitcoin from a client for $16,000 equivalent services bill yet all my $$12,000 of outgoings for staff, office space, utilities, mobile phone etc were in dollars what would happen if my bitcoin halved in value? All of a sudden my $4000 profit has turned into $4000 loss. Would businesses want to carry the risks of bitcoin in trade unless the landlord, staff,  utilities and cellphone companies all agreed to accept it as payment? Torn asunder the tax man only accepts dollars as far as I know.

Bitcoin now on prime time Japanese variety TV

492468E9-F50E-439B-8479-54B2117C3071.jpeg

The picture above is of Tetsuro Degawa, a Japanese comedian who does his best to show himself to have little intelligence. On prime time TV tonite he was talking about Bitcoin. The sign to the right partially says “can you understand Bitcoin in 5 minutes?” 

Japanese TV audiences generally gasp at new information so Bitcoin was a subject of great interest. Still one wonders if Degawa is presenting on the crypto currency that we’re one stage away from the taxi driver giving tips.

Today, Bitcoin is trading over $15,000 up another 13% today alone. Apparently Warren Buffett has disclosed Berkshire Hathaway has bought some too.

In 20 years in financial markets I cannot work out how something backed by nothing other than greed in a market that is not regulated and highly vulnerable to cyber terrorism continues to sucker more people in.

Tulip mania may be removed as the bubble yardstick before long. As one of my experienced private wealth managers likes to say, “I have difficulty fathoming the “no euphoria this time” view.”