(23.05.2008) У Citadel - один из наиболее мощных по интеллектуальной силе аналитических отделов среди всех инвестиционных фондов, а также есть «запасная» компьютерная система, расположенная где-то за пределами Чикаго.
…Два основных фонда, через которые Citadel торгует на биржах, называются Kensington Global и Wellington. Сейчас на Citadel приходится 2-3% дневного оборота торгов на Нью-Йоркской, Лондонской и Токийских биржах (около 70 млн. акций), почти 10% рынка казначейских облигаций и около 15% рынка опционов. На рынке опционов Citadel – единственный хедж-фонд, который может действительно серьезно на влиять на торги.
Фонд не ограничивает свою торговлю перечисленными инструментами, а зарабатывает буквально на всем, что продается и покупается: от фьючерсов на газ до валюты
Authored by Dave Collum via PeakProsperity.com, A downloadable pdf of the full article is available here, for those who prefer to do their power-reading offline. Introduction “He is funnier than you are.” ~David Einhorn, Greenlight Capital, on Dave Barry’s Year in Review Every December, I write a survey trying to capture the year’s prevailing themes. I appear to have stiff competition - the likes of Dave Barry on one extreme and on the other, Pornhub’s marvelous annual climax that probes deeply personal preferences in the world’s favorite pastime. (I know when I’m licked.) My efforts began as a few paragraphs discussing the markets on Doug Noland’s bear chat board and monotonically expanded to a tome covering the orb we call Earth. It posts at Peak Prosperity, reposts at ZeroHedge, and then fans out from there. Bearishness and right-leaning libertarianism shine through as I spelunk the Internet for human folly to couch in snarky prose while trying to avoid the “expensive laugh” (too much setup). I rely on quotes to let others do the intellectual heavy lifting. “Consider adding more of your own thinking and judgment to the mix . . . most folks are familiar with general facts but are unable to process them into a coherent and actionable framework.” ~Tony Deden, founder of Edelweiss Holdings, on his second read through my 2016 Year in Review “Just the facts, ma’am.” ~Joe Friday By October, I have usually accrued 500 single-spaced pages of notes, quotes, and anecdotes. Fresh ideas occasionally emerge, but most of my distillation is an intellectual recycling program relying heavily on fair use laws.4 I often suffer from pareidolia—random images or sounds perceived as significant. Regarding the extent that self-serving men and women of wealth do sneaky crap, I am an out-of-the-closet conspiracy theorist. If you think conspiracies do not exist, then you are a card-carrying idiot. Currently, locating the increasingly fuzzy fact–fiction interfaces is nearly impossible thanks to the post-election bewitching of 50 percent of the populace. “The best ideas come as jokes. Make your thinking as funny as possible.” ~David Ogilvy, marketing expert You might be asking, “What’s with the title, Dave? My 401K is doing great, and I own a few Bitcoin!” Yes, indeed: your 401K fiddled its way to new highs day after day, but this too shall pass—it always does—and not without some turbulence. This year was indeed a tough one to survey. As many peer through beer goggles at intoxicatingly rising markets, I kept seeing dead people (Figure 1). “We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping: I admit to not understanding it.” ~Richard Thaler, winner of the 2017 Nobel Prize in Economics Figure 1. An original by CNBC's Jeff Macke, chartist and artist extraordinaire. A poem for Dave's Year In Review The bubble in everything grew This nut from Cornell Say's we're heading for hell As I look at the data…#MeToo [email protected] Some will notice that in decidedly political sections, the term “progressives” is used pejoratively. Their behavior has become nearly incomprehensible to me. My almost complete neglect of the right wing loonies may reflect some bias, but politically, they have taken a knee. They have become irrelevant. Free speech is a recurring theme, introducing interesting paradoxes for employee–employer relationships. Some say I have no filter. They obviously have no clue what I want to say. In case my hints are too subtle, I offer the following: Sources I sit in front of a computer 16 hours a day, at least three of which are dedicated to non-chemistry pursuits. I’m a huge fan of Adam Taggart and Chris Martenson (Peak Prosperity), Tony Greer (TG Macro), Doug Noland (Credit Bubble Bulletin), Grant Williams (Real Vision and TTMYGH), Raoul Pal (Real Vision), Bill Fleckenstein (Fleckenstein Capital), James Grant (Grant’s Interest Rate Observer), and Campus Reform—but there are so many more. ZeroHedge is by far my preferred consolidator of news. Twitter is a window to the world if managed correctly. Good luck with that. And don’t forget it’s public! Everything needs an open mind, discerning eye, and a coarse-frit filter. “You are given a ticket to the freak show. When you’re born in America, you are given a front row seat, and some of us get to sit there with notebooks.” ~George Carlin, comedian Contents Footnotes appear as superscripts with hyperlinks in the “Links” section. The whole beast can be downloaded as a single PDF xxhere or viewed in parts—the sections are reasonably self-contained—via the linked contents as follows: Part 1 Introduction Sources Contents My Personal Year in Review Investing Economy Broken Markets Market Valuations Market Sentiment Volatility Stock Buybacks Indexing and Exchange-Traded Funds Miscellaneous Market Absurdities Long-Term Real Returns and Risk Premia Gold Bitcoin Housing and Real Estate Pensions Inflation versus Deflation Bonds Banks Corporate Scandals The Fed Europe Venezuela North Korea China Middle East Links in Part 1 Part 2 Natural Disasters Price Gouging The Biosphere and Price Gouging Sports Civil Liberties Antifa Harvey Weinstein and Hollywood Political Correctness–Adult Division Political Correctness–Youth Division Campus Politics Unionization: Collum versus the American Federation of Teachers Political Scandals Clintons Russiagate Media Trump Las Vegas Conclusion Books Acknowledgements Links in Part 2 My Personal Year in Review Who cares what an academic organic chemist thinks? I’m still groping for that narrative. In the meantime, let me offer a few personal milestones that serve as a résumé while feeding my inner narcissist. I remain linked into the podcast circuit, having had chats with Max Keiser and Stacy Herbert (Russia Today aka RT),5 Chris Martenson,6 Jim Kunstler (The KunstlerCast),7 Lior Gantz (Wealth Research Group),8 Anthony Crudele (Futures Radio Show),9 Susan Lustick (News-Talk 870 WHCU),10 Jason Burack (Wall St. for Main St.),11 Dale Pinkert (FXStreet),12 Lance Roberts (Lance Roberts Show),13 and Jason Hartman (Hartman Media Company).14 I also spoke at Lance Roberts’s Economic and Investment Summit discussing campus politics15 and the Stansberry Conference (Figure 2) arguing the merits of price gouging.16 I got into a big spat with the American Federation of Teachers and some local social justice warriors that made it to the national press (see “Unions”) and dropped 30 pounds unaided by disease. “And, before anyone should doubt what a chemistry professor would know about unions and what effect they would have, it should be noted that Collum has amassed a following for his annual 100-page papers on the state of business and politics. Turns out, he knows a thing or two about economics and politics as well.” ~Joe Cunningham, RedState Figure 2. The lovely Grant Williams, brainy Danielle DiMartino Booth, and one of the Paddock brothers in Las Vegas. On the professional side, I had a great year: I finished my stint as department chair; started a sabbatical leave; broke my single-year total publication record; and broke my single-year record for papers in the elite Journal of the American Chemical Society. I attempted to extend a contiguous string of 20 federal grants without a rejection by submitting two NIH grants and subsequently got totally blown out of the water. (OK. I’m still walking that one off. I think the panel finally noticed that I am deranged.) I was accepted into an organization called the Heterodoxy Academy, whose membership includes hundreds of tenured professors standing up for free speech on college campuses.17 “My job is to write the exact same thing between 50 and 100 times a year in such a way that neither my editors nor my readers will ever think I am repeating myself.” ~Jason Zweig, Wall Street Journal columnist Investing “I dig your indefatigable bearishness, my friend.” ~Paul Kedrosky, one of the earliest bloggers I’m sensing a tinge of Paul's sarcasm. My net worth from January 1, 2000, has compounded at a ballpark annualized rate of 7 percent. That’s not so bad, but the path has been rather screwy. From mid ’99 through early ’03, I carried cash, gold, silver, and a small short position. I kept buying gold through about 2005 (up to $700 an ounce), resumed in 2015, and bought several multiples of my annual salary’s worth in 2016. I’m done now. Gold is up 8 percent, and silver is down –2 percent in 2017 thanks to a minor end-of-year sell off. The spanking from ’11 to ’15 seems to have subsided. Precious metals, etc.: 29% Energy: 0% Cash equivalent (short term): 62% Standard equities: 9% “Most people invest and then sit around worrying what the next blowup will be. I do the opposite. I wait for the blowup, then invest.” ~Richard Rainwater I was totally blindsided by the downturn in gold starting in ’11 and energy in ’13. (Energy peaked in ’08 but was on the mend until ’13.) I bought energy steadily starting in ’01 with broadly based energy funds and a special emphasis on natural gas. The timing of entry was impeccable and all was going swimmingly—I was a genius!—until the Saudi oil minister attempted to talk oil down from $110 to $80 per barrel18 in '13. He thought he could blow the frackers out of the game fast, but it was a hold-my-beer moment for our credit system. The frackers kept fracking, the oil price overshot the Sheik's target by $50 per barrel, and I got whacked for 30–45% losses over four years starting in '14.19 It is impossible to know when you’re being a highly disciplined buy-and-hold investor—a Microsoft and Apple gazillionaire refusing to sell—or just an idiot. I sensed that the rotten debt had been purged and we were through the worst of the energy downturn. I worried that a recession could do a number on me, but it took years to get to my position through incremental buying. I’m holding on, goddammit! We seem to be running out of downside. Unbeknownst to me until October, however, my employer had liquidated my energy funds—every last one of them—and put me in a life-cycle fund in April. Sell ’em after they plummet? Thanks guys. A rational investor, if committed to hold them, would undo the general equity fund restrictions—I did—and buy the energy funds right back—I didn’t. Friends in high places all said to wait. About a week later, the Middle East erupted in what looked like a sand-to-glass phase transition (see “Middle East”), and energy started to move in sympathy. Peachy. Fidelity actually saved me a little money, but I am still white-knuckling the cash, growing a long wishlist, waiting for a generalized sell-off/recession to offer some serious sub-historical-mean bargains (see “Broken Markets”). The correction in ’09 at the very bottom brought us to the historical mean, but not through it. For this reason, I have largely skipped this equity cycle. The current expansion is long in the tooth and founded on poor fundamentals. I hope that the wait won’t be too long. Until then . . . “Remember, when Mr. Market shows up at your door, you don’t have to answer.” ~Meb Faber, co-founder and CIO of Cambria Investment Management Economy “A decade after the biggest crisis since the Depression, a broad synchronized recovery is under way.” ~The Economist, March 2016 Whoa! Fantastic! Goldilocks survived another bear. There is just one hitch: that was a total load of crap in 2016, and it’s a colossal load now. Let’s take a peek at a few gray rhinos—“large and visible problems in the economy that are ignored until they start moving fast.” GDP growth rates from 1930–39 and 2007–16 were as follows:20 GDP growth in the 1930’s 1930: –8.5% 1935: 8.9%1931: –6.4% 1936: 12.9%1932: –12.9% 1937: 5.1%1933: –1.3% 1938: –3.3%1934: 10.8% 1939: 8.0% GDP growth in the new millennium 2007: 1.8% 2012: 2.2%2008: –0.3% 2013: 1.7%2009: –2.8% 2014: 2.4%2010: 2.5% 2015: 2.6%2011: 1.6% 2016: 1.6% Whether you use the arithmetic or geometric mean, both gave us 1.3 percent annualized growth. Let’s spell this out: during the recent era in which markets soared, the economy tracked the Great Depression. It is instructive to look at the economy with a little more granularity than the writers at The Economist-Lite. According to John Mauldin, total domestic corporate profits have grown at an annualized rate of just 0.1 percent over the last five years.21,22 Goldman’s Abby Joseph Cohen says R&D spending is down to 2.5 percent of GDP from 4.5 percent and is a drag on the economy.23 Economic bellwether General Electric saw revenue drop 12 percent and earnings fall 50 percent year-over-year,24 and these numbers are aided by the company’s legendary creative accounting schemes.25 Meanwhile, corporate America witnessed a 71 percent rise in business debt since 2008. According to economist Lacy Hunt, “It’s the investment, the real investment, which grows the economy,” prompting the legendary market maven @RudyHavenstein to state dryly, “I like Hunt.” Where are they spending all that borrowed money? Hold that thought. Long-term demographic problems—“quantitative aging” (Figure 3)—exacerbated by dropping sperm counts26 suggests the economy will continue to shoot blanks. Figure 3. Demographics looking sketchy. Putative job gains affiliated with this low growth are fragile if not dubious as hell and are being boosted by the “Dusenberry effect”—consumers’ reluctance to stop spending even after their income drops—which will cause the next recession to be a real Dusey. (Sorry.) Eventually, common sense prevails as companies run out of credit and savings-deficient consumers reassume the fetal position. According to extensive work by Ned Davis Research, cash levels among households are near their lowest levels of all time; consumer resiliency is always temporary. “When it is all said and done, there are approximately 94 million full-time workers in private industry paying taxes to support 102 million non-workers and 21 million government workers. In what world does this represent a strong job market?” ~Jim Quinn, The Burning Platform blog The Bureau of Labor Statistics has turned to Common Core math. How can we have 100 million working-age adults—40 percent of the working-age population—not working, 4 percent unemployment, and employers claiming the labor market is tight? Are 90 percent of those without jobs professional couch potatoes? Let’s first look at employment in some detail and then address that whole “tight” part. Googles of pixels have been dedicated to the obligatory labor force participation rate (Figure 4), a critical component of any economic debunking. Of those employed, 26 million people are in low-wage, part-time jobs (Figure 5), 8 million hold multiple jobs, and 10 million are “self-employed.”27 Another 21 million work for the government, which means they are a tax on the free market. In 2016, 40 percent of new jobs were fabricated through the specious “birth and death model.”28 2017 will presumably post similar numbers. Occasional reports of large job growth are deceptive. July, for example, witnessed 393,000 benefit-free, part-time, low-skill jobs offset by a drop of 54,000 full-time workers. Payroll numbers keep coming in lower than expected, which economists invariably blame on some big, yet unseen effect they are paid to notice. Nine out of 10 millennials living on their parents’ couches a year ago are still clutching TV remotes.29 There are now 45–50 million Americans on food stamps, up from 14 million in December 2007,30 when the last recession was already underway. Figure 4. Labor force participation. I am going to let Jeff Snyder take a crack at explaining the tight labor market:31 “The economy is tight, not favourably tight as in no slack in the labour market, but more so tight in that there is little margin for addition. . . . The reality in the markets is this: executives are reluctant to pay wages at a market-clearing rate.” ~Jeff Snyder, Alhambra Investments Figure 5. Low-paying service jobs versus manufacturing jobs. Poor economic numbers are pervasive. Auto sales are canaries in the coal mine and getting crushed despite aggressive incentives.32 Ford is already suffering and predicting a multi-year slowdown.33 A car industry crunch analogous to that in ’09 may appear in ’18 as expiring leases leave consumers underwater owing to dropping used car prices, and decreasing profits in the auto industry may “then turn from secular to structural problems.”34 Morgan Stanley predicts a 50 percent drop in used car prices over the next 4–5 years,35 which will gut the new car business. The auto downturn has already begun. Wells Fargo is reporting large drops in auto loans after a long stretch during which subprime car loans flourished yet again.36 That should put a fork in the new car market. Yield-starved investors are chasing cash- and income-starved car buyers. Subprime auto-asset-backed securities will take yet another beating. Chrysler is teaming up with Santander Consumer USA to push out “unverified income” subprime auto loans using “automated decision making.” Santander seems to have nine lives, and they’ll need all of them. The hyperdeveloped loan market for used cars, however, is already faltering (Figure 6); delinquency rates are rising. Goldman expects “challenging consumer affordability” and has downgraded General Motors to “sell.”37 Those cars y’all bought on cheap credit yesterday will not be bought tomorrow. Claims that the hurricanes cleared out auto inventory38 are grotesquely underestimating the magnitude of the overhang and will be paid for by reduced consumption in other sectors. Any consumption pulled forward with debt has a deferred cost. Figure 6. Some key auto industry stats (a) loans and leases, (b) loan delinquencies. We’ll take a crack at the housing market in its own section and simply note here that the cost of renting or buying normalized to income has never been higher. Approximately half of tenants spend more than 30 percent of their income on rent, doubling from a decade ago.39 A survey of 20 cities showed that housing costs are growing at a 6 percent annualized pace. Our paychecks are not. Housing is a bubblette and likely to offer fire-sale bargains again. What many fail to grasp is that the reduced cost of borrowing owing to low rates is offset by higher prices. When interest rates were 15 percent, houses were cheap. Austrian business cycle theory says easy money policies generate overdevelopment and other malinvestment. The day of reckoning appears to be here. (I say that every year…channeling Gail Dudek.) Familiar brands like Toys “R” Us (my keyboard has no backwards R), JCPenny, Abercrombie & Fitch, Sears, Bon-Ton, and Nordstrom are gasping their last gasps before drowning in debt with no customers to save them. Total retail revenues and sales (including online) are up only 28 percent from the 2007 high.40 The management of Ascena Retail referred to an “unprecedented secular change.”41 More than 100,000 retail jobs have vaporized since October 2016.42 Credit Suisse estimates that more than 8,000 retail outlets closed this year.43 Consumer goods companies have held up better because consumers generally put off starving or freezing to death until all options are exhausted. Restaurants are extending the longest stretch of year-over-year declines for 16 consecutive months (last I looked).44 Business Insider blames millennials because they are “more attracted than their elders to cooking at home” (particularly when it’s their parents’ home.) Manhattan retail bankruptcies are called “horrifying.”45 Chapter 11s and company reorganizations in foreign courts increased sevenfold.46 Mall owners are using jingle mail—a term from the ’08–’09 crisis referring to leaving keys to creditors. Commercial retail will be coming into its own refinancing wave in 2018. Bears are sniffing around commercial-mortgage-backed securities as malls around the country begin to die.47 The next downturn will finish many of them off. Exchange-traded funds (ETFs) are positioning to short the brick-and-mortar retail. (Quick: somebody grab the ticker symbol “MAUL.”) Some suggest the Rout in Retail is merely a secular shift to online. Sounds logical except online sales represent only 8.5 percent of total retail sales.48 This argument might be masking a huge downturn in retail corresponding to the bursting of yet another Fed-sponsored bubble. As Amazon encroaches on every nook and cranny of retail sales, what began as a murmur has turned into a chorus: “This isn’t fair; somebody must do something!” Walmart knows this plotline. Market dominance does not connote “monopoly,” but Amazon has an image problem. Amazon gets a $1.46 subsidy (discount) per box from the USPS, well below its cost.49 Seems cheesy. Congress is showing concern out of self-interest. A monopoly is when a company uses its power to blow its competitors out of the water garishly. Who decides what is garish and when enough is enough? A judge under political pressure. A detailed summary of the breadth of Amazon’s market share and its anti-competitive pricing suggests that we are getting close.50 There’s nothing like a protracted anti-trust suit to mute the growth of a large conglomerate. Just ask the Microsoft high command. If our problems are not Amazon, what are they? Austrian business cycle theory says that our debt-driven, consumer-based economy endorsed by sell-side economists and analysts worldwide is unsustainable. Wealth is made, mined, grown, or coded, only then do you get to consume it. Wealth is extinguished by consumption, depreciation, and destruction. Central bankers seem to believe you can will wealth into existence by generating animal spirits. The next recession will start unnoticeably. Economists seem to miss every single one, often declaring telltale indicators irrelevant. Then you will hear phrases like “technical recession,” “growth recession,” or “earnings recession,” all eventually giving way to somebody opening the Lost Arc. If the next recession flushes the waste products (malinvestment) left behind by the central-bank-truncated ’08-’09 recession, it will reveal the central bankers to be charlatans. Even a typical recession witnesses near 40 percent losses in equity portfolios, which will leave already immunocompromised consumers vegetative. Banks will constrict lending to preserve capital, further slowing the economy. Weak businesses living off easy credit will become pink mist. An accelerating vicious cycle downward will take with it formerly viable businesses that could have survived a less arrogant monetary policy. This collateral damage was avoidable at least in its magnitude, but it can’t be avoided now. Are we on the cusp of the next recession? Citigroup “clients” say not even close (Figure 7). I think we are staring into the abyss. Figure 7. June 2017 Citigroup client survey of recession odds. Will this expansion continue because it has been pathetic or die because it is old? I cast my vote for the latter. The Fed and its central bank brethren, whether to retrieve residual credibility—they have precious little—or out of the deep-seated, albeit misguided belief that they are in charge of the economy, have decided it is time to “normalize rates” and undo quantitative easing. (We are now forced to accept the equally silly term “quantitative tightening.”) You can blame the ensuing problems on the tightening if you wish, but the huge mistakes were made long before this tightening cycle commenced. Every postwar recession until now was been preceded by a tightening cycle (although not all tightening cycles lead to recessions). Why not simply refuse to tighten? It won’t work, but the Fed governors are probably entertaining this possibility. “The central banks did their job. Unfortunately, almost nobody else has done theirs.” ~Martin Wolf, Financial Times “As has come to be commonplace, almost everything Mr. Wolf suggests is incorrect.” ~Tim F. Price, Cerberus Capital and author of Investing Through the Looking Glass (see “Books”) I’ll close this discussion with a brief mention of “creative destruction,” the process by which the new (and improved) ushers out the decrepit and out-of-date. It is a central tenet of capitalism—survival of the fittest—but has a disruptive dark side. McDonald’s (and every other service industry) is turning to kiosks to replace more costly human labor. Driverless cars will be awesome but also force car-based workers—potentially millions of them—to find new work. The financialization of the economy by central bankers has tipped the capital–labor balance profoundly toward capital. We will produce goods better and more efficiently, but the Darwinian adjustments will rock the system. Accelerated product cycles facilitated by excess capital can also be highly inefficient. The Erie Canal was completed in 1825 and faced its own black swan—railroads—that same year. Blockbuster was offed by Netflix as fast as it appeared. Can creative destruction happen too fast? Have product cycles become too short? Bulldoze your house every five years to build a better one and tell me how that works. Loose credit accelerates creative destruction, but not without a price. “A high initial saving rate has been associated with subsequently stronger economic growth, while a low saving rate produces a lower growth pattern.” ~Lacy Hunt, economist, noting soaring consumer debt Broken Markets “I think we have fake markets. . . . Everything is so tight, it is hard to pick a winner from a group that is fake.” ~Bill Gross, Janus "One word characterizes why the bull market can go on for years…'Goldilocks'" ~Sam Ro, Yahoo Finance “I’m not worried about the economy so much; what I’m concerned about is valuation.” ~David Swensen, Yale University’s longtime CIO "I think the bull market could continue forever." ~Jim Paulsen, Wells Fargo Regression to the mean is a force of nature. It is also a mathematical truism that markets reside below the mean for half of their price-weighted existence. The failure to go through the mean in ’09 is an anomaly caused by global central bankers that remains as an IOU on investors’ balance sheets and foreshadows trouble to come. Our system is constantly being overtly displaced from equilibrium by central bankers who view displacement as their mandate. Physical scientists know that any system displaced from equilibrium tends to return to equilibrium. The French physicist Carnot, often called the father of modern thermodynamics, showed that the round trip necessarily comes at a cost no matter how efficient the process: it’s a law of physics. Any chemist will tell you that a system massively displaced often returns with a considerable cost: you blow up your laboratory. Geologists? Volcanoes and earthquakes. Ski bums? Avalanches. How far are asset markets from equilibrium? The pros have some opinions: “Asset valuations historically aren’t way out of line, but elevated I would say, relative to historical averages.” ~Lael Brainard, Federal Reserve governor “Measured against interest rates, stocks actually are on the cheap side compared to historic valuations.” ~Warren Buffett, Berkshire Hathaway, channeling the Fed model “Compared to the Dutch Tulip Mania of 1637, stocks still look undervalued.” ~Rudy Havenstein (@RudyHavenstein), Funniest Tweeter of the Millennium Case closed. Let’s get a six-pack and watch football. The problem is that Brainard is a Fed governor, Havenstein is nuts, and Buffett is known for spewing some serious bullshit. Buffett’s favorite indicator—market cap to GDP—is double the historical mean (vide infra)—what market analyst John Hussman calls “historically offensive valuations.” Buffett also wrote an article in 1999 stating without qualification that returns are not about the economy at all.51 Secular bull markets are powered by falling interest rates and secular bear markets by rising rates. With interest rates at multi-century lows, it seems likely the old codger knows that his implicit reliance on the Fed’s valuation model is lunacy. As an aside, Berkshire has the largest cash hoard in its history—$100 billion—and it’s not being used to buy stocks that are “on the cheap side.” Others, only partially impeded by cognitive dissonance and the task of selling assets at any cost, seem to have neurons firing spasmotically (sense something): “We think the market still has the potential to move higher as investors capitulate into equities.” ~Merrill Lynch “Folks, I have been in this business for over 46 years, and observing markets with my father for 54 years, and I have never experienced anything like what is currently happening. . . . There are years left to run in this one.” ~Jeff Saut, Raymond James “It seems like uncertainty is the new norm, so you just learn to live with it.” ~Ethan Harris, global economist at Bank of America Merrill Lynch The fear of missing out (FOMO) is driving the markets way out over their skis. Markets could get much crazier, of course, but as any serious blackjack card counter will tell you, when the deck is stacked against you, size your bets accordingly. "If you pay well above the historical mean for assets, you will get returns well below the historical mean." ~Paraphrased John Hussman This Hussman quote is a recycle from last year but well worth repeating to make sure you understand it. He goes on to channel Ben Graham by noting that the devastating losses come from purchasing low-quality securities when times are good. The Hussman quote also pairs well with ideas about valuation I cobbled together from a well-known maxim about savings: “Overvaluation is appreciation pulled forward.” “Undervaluation is deferred appreciation.” ~David Collum This one passed the Google test for originality. I don’t know about you, but I want my appreciation in the future, or as James Grant (channeling Joe Robillard) likes to say, “I want everybody to agree with me . . . only later.” Valuations are meaningless as long as market participants are determined to buy stocks, but that mood will change at some point. Once markets are overvalued, however, you will give back those and any further gains during the next irrepressible regression to the mean, more so as you linger below the mean. I hasten to add that slight overvaluation is not a problem: the regression will be embedded within the noise. If, however, markets are way overvalued, an unknowable but inevitable combination of price drop and time—a retrenchment that could last decades—will usher invested boomers to the Gates of Hell. What do current valuations tell us about future returns assuming the laws of thermodynamics have not been repealed? Market Valuations “The median stock in the S&P has never been valued higher than it is today.” ~Jesse Felder, The Felder Report “There’s just no other way to say it: the market is insanely overvalued right now. It’s the longest recovery in history. It’s also the weakest. But you’d never know it from the stock market.” ~ David Stockman, former Reagan economic advisor and former Blackstone group partner “We are observing an episode that will make future investors wince. Just like the two closest analogs, the 1929 high and the tech bubble, I expect that future investors will shake their heads in wonder at the stark raving madness of it all, and ask what Wall Street could possibly have been thinking.” ~John Hussman, Hussman Funds “The gap between the S&P 500 and economic fundamentals can now be measured in light years.” ~Eric Pomboy, president of Meridian Macro Research "I believe fragilities today are much more systemic on a global basis than back in 2007. Where’s the Bubble? Virtually everywhere… The scope of today’s global Bubble goes so far beyond 2007." ~Doug Noland, McAlvaney Wealth Management It took a few years to blow up yet another equity bubble—referred to fondly by Jesse Felder and others as the “everything bubble”—but determined central bankers are not in short supply. A host of metrics point to a very mean regression cited below. As I rattle off a few stats, bear in mind the serious yet unknowable losses possible if regression rips through the mean. “Russell 2000 with a 75 p/e is just astronomical.” ~Jesse Felder Starting simple: McDonald’s saw zero revenue growth between 2008 and 2016 but had a 154 percent growth in debt. Its share price is up more than 200 percent. This is not an outlier. Additional examples assembled by Mike Lebowitz of 720Global are shown in Figure 8. I know it’s a table, but look at the contrasting revenue growth versus share price gains! Figure 8. Revenue growth versus price change. “And please don’t claim corporate profits are soaring, so the valuations are justified. . . . Corporate profits are unchanged since 2014—no growth at all.” ~Charles Hugh Smith, Of Two Minds blog The S&P 500 resides 70 percent above its ’07 high even though nominal GDP and total sales rose 10 percent during the same period. Price-to-revenue ratios are sharing the nosebleed seats with 1929 and 2000 (Figure 9).52 Buffett’s market cap–to-GDP indicator is no better, prompting Felder to guesstimate prospective 10-year returns—returns going to somebody else, apparently—at -2.6% annualized.53 In case you suck at math, you will be 10 years older, 33 percent poorer, and in need of a 50 percent gain to stumble your way back to even. Ever the optimist, John Hussman and his relatively complex valuation model, which shows high correlations when back-tested, predicts 60–70 percent losses over the next 10 years.54 To help the value-driven bottom-feeders, Hussman broke down the markets by valuation “deciles” and found that even the deep-value guys are looking at a >50 percent haircut—“haircut” sounds better than “castration” or “blood eagle”—at the end of the current market cycle.55 “Given the performance of certain stocks, we wonder if the market has adopted an alternative paradigm for calculating equity value. . . . What if equity value has nothing to do with current or future profits and instead is derived from a company’s ability to be disruptive, to provide social change, or to advance new beneficial technologies, even when doing so results in current and future economic loss? . . . After years of running into the wind, we are left with no sense stronger than, ‘it will turn when it turns.’ . . . Just because AMZN can disrupt somebody else’s profit stream, it doesn’t mean that AMZN earns that profit stream. For the moment, the market doesn’t agree. Perhaps, simply being disruptive is enough.” ~David Einhorn with tongue in cheek The legendary Howard Marks, using non-GAAP earnings (with a 25 percent fictional fudge factor)56 to calculate trailing P/E ratios, sees a 40 percent regression to the mean. The Case-Shiller weighted P/E ratio—far superior to the non-GAAP alternatives—is in the top 3 percent of historical readings,57 prompting Bob Shiller to dryly note that the markets are “at unusual highs.” (By the way, it was Shiller who slipped Greenspan the phrase “irrational exuberance.”) Dividend yields have flopped around over the centuries. A 56 percent equity decline is required to attain the 150-year historical average of 4.4 percent—assuming reduced cash flows owing to the price collapse don’t lead to dividend cuts.58 Tobin’s Q—essentially price-to-book value ratio and the favorite of Mark Spitznagle—is at all-time highs. The Economist sounds dismissive by suggesting that “a high Tobin’s Q signals that an industry is earning a lot from its assets,"59 which suggests that The Economist is underutilizing its intellectual assets. Figure 9. Valuation metrics from Grant Williams’s World of Pure Imagination.60 Consistency aside, how can these predictions possibly be correct? The reported P/Es are not that bad. The high-growth QQQ index, for instance, is sporting a P/E of only 22, and the Russell 2000—the small-cap engine of economic growth—is in the same neighborhood. Alas, Steve Bregman of Horizon Kinetics notes that the P/E of the QQQ is calculated by rounding all P/Es above 40 down to 40 and assigning a P/E of 40 to all negative P/Es—companies losing money, aka Money Pits.61 For some of the largest companies in the QQQ—think Amazon—with almost no GAAP earnings, these little fudge factors are not just rounding errors. In the scientific community, we call such adjustments “fraud.” Bregman pools the market caps and earnings to give a more honest analysis, which gently nudges the QQQ P/E to 87. In short, Wall Street is “making shit up.” Mark Hulbert, noting that more than 30 percent of the Russell 2000 companies are losing money, concurs with Bregman and suggests that the rascals at the parent company would get a P/E of 80 if they weren’t fibbing like teenagers.62 Market Sentiment Which FANG Stock Will Be The First To Break Out? ~Headline, Investor’s Business Daily (September) I couldn’t care less about market sentiment except to understand how we got to such lofty valuations and how investors have become drooling idiots babbling incoherently about their riches. Nothing scares these markets. Previous bubbles always had a great story, something that investors could legitimately hang their enthusiasm on. The 1929 and 2000 bubbles were floated by dreams of truly fabulous technological revolutions. The current bubble is based on a combination of religious faith in central bankers and, as always, investors’ deluded confidence in their own omnipotence as market timers. Oh gag me with a spoon, really? Unfortunately, some group of prospective toe-tagged investors with silver dollars on their eyes are going to own these investments to the bottom. For now, though, we have nothing to fear but fear itself. Veni vidi vici. “This is not an earnings-driven market; it is a momentum, liquidity, and multiple-driven market, pure and simple.” ~David “Rosie” Rosenberg, economist at Gluskin Sheff The FOMO model is not restricted to Joe and Jane Six-pack. Norway’s parliament ordered the $970 billion sovereign wealth fund to crank up its stock holdings from 60 percent to 70 percent.63 Queuing off an analysis I did last year, a collective (market-wide) allocation shift of such magnitude would cause a 55 percent gain in equities.64 The percentage of U.S. household wealth in equities is in its 94th percentile and above the 2007 numbers.65 A survey of wealthy folks shows they expect an annualized 8.5 percent return after inflation.66 Good luck with that if you wish to stay wealthy. At current bond yields, a 60:40 portfolio would need more than 12 percent each year on the equities. Venture capitalists think they can get 20 percent returns (despite data showing this to be nuts.)67 Maybe they can set up an ETF to track the 29-year-old high school dropout and avid video gamer who professed to love volatility and got himself a 295 percent gain in one year trading some crazy asset (probably Tesla or “vol”).68 He actually ordered a Tesla and proclaimed, “I will soon get my license!” Better get that Tesla ordered soon, young Jedi Knight, given the company’s annualized $2+ billion burn rate and stumbling production numbers. Meanwhile, the legendary Paul Tudor Jones' fund saw 50 percent redemptions.69 (Boomers: Insert Tudor Turtle joke here.) Prudence disappoints investors in the final stages of a market cycle. Unsurprisingly, the complacency index is at an all-time high.70 The oft-cited Fear and Greed Index (explained here71) is pegging the needle on extreme greed (Figure 10). A survey by the National Association of Active Investment Managers found investment managers to be more than 90 percent long the market.72 An American Association of Individual Investors survey showed that retail portfolios were at their lowest cash levels in almost two decades.71 High “delta,” which supposedly reflects investors’ willingness to use levered calls to catch this rally,72 suggests that investors perceive that risk has been eradicated in these central-bank-supervised markets. The few investors retaining a modicum of circumspection are “suffering extreme mental exhaustion” (PTSD) watching the consequences of the “deadweight of [the] US$400 trillion ‘cloud’ of financial instruments . . . supported by ongoing financialization” levitate anything with a price tag on it.73 Booyah Skidaddy. Let’s not forget, however, that traders make tops and investors make bottoms. In the next bloodletting, we may see bonds and stocks compete in synchronized diving. While traders run with the Pamplona bulls, investors sit in the shadows waiting for their day in the sun. Figure 10. Fear and Greed Index. Volatility Market pundits hurl around several definitions of volatility, and both have gotten huge press this year. A narrow dispersion of prices has arisen from the collusion of sentiment, $3 trillion of quantitative easing this year alone,74 trading algos, and programmed contributions to index investments that have created markets that seem very tame (not volatile). Headlines reported all sorts of records such as days without a 1 percent drop,75 consecutive S&P 500 closes within 0.5 percent of previous closing price,76 longest streak of green closes on the S&P, consecutive months without a loss,77 index advances accompanied by new 52-week lows,78 and days without a 3 percent draw down.79 Often the records were kept intact thanks to late-day panic-buying by the FOMO crowd. For the short sellers, it has been the Bataan Death March, particularly in February, when a leveraged fund was forced to liquidate billions of dollars of short positions.80 Even the treasury market shows an “implied volatility” at its lowest level in more than 30 years,81 which highlights historic investor complacency. Some say it is a new era; others see a calm before the storm. A second definition of volatility is explained in Investopedia:82 Volatility: A variable in option pricing formulas showing the extent to which the return of the underlying asset will fluctuate between now and the option’s expiration. Volatility, as expressed as a percentage coefficient within option-pricing formulas, arises from daily trading activities. How volatility is measured will affect the value of the coefficient used. Glad to have cleared that up. It’s no surprise the market players found a way to turn an arcane market indicator into a trading device: you can buy and sell vol through various indices such as the “VIX,” XIV, and “SVXY.” What’s more, the buying and selling of vol influences the markets (10× leveraged according to Peter Tchir). As the vol indices go down, the markets go up, and if I have this right, there is causality in both directions. Vol has been plumbing record lows. Indeed, those shorting vol (driving it down) are making fortunes—a one-decision trade—at least until buying vol becomes the new-and-improved one-decision trade. Billions have flooded into vol short funds each week.83 It is estimated to be a $2 trillion market. Barron’s called shorting the VIX “the nearest thing to free money.”84 References to exceptionally high “risk-adjusted returns” leave me wondering: How do you adjust for risk on the vol trade? Maybe we should consult the logistics manager at a Target store who made a cool $12 million in five years by shorting the VIX.85 He reminds me of those Icelandic fishermen-turned-bankers. They did quite well for a while, but they returned to fishing the hard way. In an incisive analysis of the risks of the vol trade,86 Eric Peters notes that “to sell implied volatility at current levels, investors must imagine tomorrow will be virtually identical to today.” Seems like a reach given that such an assumption has no precedent in the recorded history of anything. The fact that 97 percent of VIX shares are sold short also seems a wee bit lopsided (Figure 11).87 The VIX even had a flash crash88: how ironic is that? JPM’s Marko Kolanovic—reputed to be one of the best technical traders in the known universe—says that a regression of the VIX to the historical norm could cause “catastrophic losses” because of all the shorts.89 Given that volatility begets volatility, forcing an epic short squeeze on $2 trillion of vol shorts at some point, one wonders what comes after “catastrophic”? Figure 11. Volatility (VIX) short positions. Stock Buybacks “Companies might have to start rotating out of the debt that they incurred to buy back their stock and start issuing stock.” ~Chris Whalen, The Institutional Risk Analyst In 2016, I referred to Whalen’s vision of stock buybacks as “buying high–selling low.”90 Peter Lynch’s original enthusiasm for buybacks was that clever management sneakily buys back undervalued shares, not overvalued shares. This buyback ploy began to turn into a scam in 1982, when buybacks were excluded from rules prohibiting price manipulation.91 Buybacks are so large now that they correlate with and quite likely cause large market moves (Figure 12). Since 2009, U.S. companies have bought back 18 percent of the market cap, often using debt—lots of debt.92 The 30 Dow companies have 12.7 billion fewer shares today than in ’08: “the biggest debt-funded buyback spree in history.” An estimated 70 percent of the per-share earnings—24 percent versus only a 7 percent earnings gain since 2012—is traced to a share count reduction from buybacks.93 Pumping the share prices at the cost of rotting the balance sheet (which gullible investors ignore) achieves two imperatives: it prolongs executive employment and optimizes executive compensation. Contrast this with paying dividends to enrich shareholders to the detriment of option holders. The rank-and-file employees might be comforted if companies plugged the yawning pension gaps instead (vide infra), but such contributions would have to be expensed, lowering earnings and, stay with me here, reducing executive compensation. Figure 12. (a) S&P real returns versus margin debt. (b) S&P nominal returns versus share buybacks, and (c) buybacks versus corporate debt. In one hilarious case, Restoration Hardware, a loser by any standard except maybe Wall Street’s, used all available cash and even accumulated debt to buy back 50 percent of its outstanding shares to trigger a greater than 40 percent squeezing of the short sellers who, mysteriously, think the company is poorly run.94 In the “eating the seed corn” meme, the 18 biggest pharmaceutical companies’ buybacks and dividends exceed their R&D budgets.95 Market narrowing—the scenario in which a decreasing number of stocks are lifting the indices—is acute and ominous to those paying attention.96 The so-called FAANGs + M (Facebook, Apple, Amazon, Netflix, Google, and Microsoft) have witnessed a 50 percent spike in their P/E ratios in less than 3 years.97 The FAANGs compose 42 percent of the Nasdaq and 13 percent of the S&P. An astonishing 0.2 percent of the companies in the Nasdaq have accounted for 45 percent of the gains.98 This is a wilding. The average stock, by contrast, is still more than 20 percent off its all-time high. What is going on? Indexing and Exchange-Traded Funds “When a measure becomes an outcome, it ceases to be a good measure.” ~Goodhart’s Law Charles Goodhart focused on measuring money supply,99 but his law loosely applies to any cute idea that becomes widely adopted (such as share buybacks). This is total blasphemy, but market indexing may be a colossal illustration of Goodhart’s Law. John Bogle was the first to articulate the merits of indexing in his undergraduate thesis at Princeton.100 Columbia University professor Burt Malkiel provided a theoretical framework for the notion that you cannot beat the market, which was translated into the best-selling book A Random Walk Down Wall Street. Even Warren Buffett endorses the merits of indexing, although once again, his words belie his actions. Bogle’s seminal S&P tracking fund now contains 10% of the market cap of the S&P 500 after quadrupling its share since ’08. (Behaviorist Peter Atwater attributes the recent enthusiasm to investors who are PO’d at active managers.)101 “When the world decides that there is no need for fundamental research and investors can just blindly purchase index funds and ETFs without any regard to valuation, we say the time to be fearful is now.” ~FPA Capital Then there are the massively popular ETFs that allow you to index while picking your favorite basket of stocks (have your cake and eat it too). Is there anybody who disagrees with the merits of indexing? Didn’t think so. Do ya see the problem here? Goodhart might. Maybe I was oblivious, but acute concerns about indexing seem to have emerged only in the last year or so. Let’s ponder some of them, but only after a brief digression. “There is no such thing as price discovery in index investing.” ~Eric Peters, CIO of One River Asset Management In his must-read book The Wisdom of Crowds, James Surowiecki posits that a large sample size of non-experts, when asked to wager a guess about something—the number of jelly beans in a jar, for example—will generate a distribution centered on the correct answer. Compared with experts, a crowd of clueless people offers more wisdom. I submit that this collective wisdom extends to democracies and markets alike. A critical requirement, however, is that the voting must be uncorrelated. Each player must vote or guess independently. As correlation appears, the wisdom is lost, and the outcome is ruled by a single-minded mob. Thus, when everybody is buying baskets of stocks using the same, wholly thoughtless protocol (indexing), the correlation is quite high. Investors are no longer even taking their own best guesses. The influence of correlation is amplified by a flow of money (votes) putting natural bids under any stock in an index, even such treasures as Restoration Hardware. What percentage of your life’s savings should you invest without a clue? Cluelessness has been paying handsome rewards. A big problem is that index funds and ETFs allocate resources weighted according to market cap and are float-adjusted, reflecting the market cap only of available shares not held by insiders. You certainly want more money in Intel and Apple than in Blue Apron, but indexing imposes a non-linearity that drives the most overpriced stocks to become even more overpriced. That is precisely why the lofty valuations on the FAANGs just keep getting loftier. The virtuous cycle is the antithesis of value investing. The float adjustment drives money away from shares with high insider ownership. Curiously, an emerging strategy that is not yet broadly based (recall Goodhart’s Law) is to find investments that are not represented in popular indices or ETFs on the notion that they have not been bid up by indexers. “With $160-odd trillion global equity market capitalization, we have much more opportunities for ETFs to grow, not just on equities, but in fixed income. And I believe this is just the beginning.” ~Larry Fink, CEO of Blackrock, the largest provider of ETFs The indexed subset of the investing world could be at the heart of the next liquidity crisis. In managed accounts, redemptions can be met with a stash of cash at least for the first portion of a sell-off. This is why air pockets (big drops) often don’t appear early in the downdraft. By contrast, ETFs trade shares robotically—quite literally by formulas and algos (the robots)—with zero cash buffer. The first hint of trouble causes cash inflows to dry up and buying to stop. Redemptions by nervous investors cause instantaneous selling. Passive buying will give way to active selling. The unwind should also be the mirror image of the ramp: FAANGs will lead the way down owing to their high market caps. Once again, selling begets selling, and the virtuous cycle quickly turns vicious. Investors will get ETF’d right up the...well, you get the idea. “You’re better off knowing which ETFs hold this stock than what this company even does. . . . That’s scary to me. . . . The market needs to have a major crash.” ~Danny Moses, co-worker of Steve Eisman “Throw them out the window.” ~Jeff Gundlach, CIO of DoubleLine Capital, on index funds I would be remiss if I failed to note that there are also some really wretched ETFs. What are the odds, eh? I’m not sure I even believe this, but it has been claimed that a 3×-levered long gold mining ETF lost –86 percent while a 3×-levered short gold mining ETF lost –98 percent, both over the same time frame that the GDX returned zero percent. You wouldn’t want to pair-trade those bad boys. It is also rumored that the SEC has approved 4×-levered equity ETFs. Investors are going to be seeing the inside of a wood chipper at some point. A 3×-levered Brazilian ETF (BRZU) lost 50 percent in a single day. Apparently none of these investors ever saw The Deer Hunter. We might as well set up ETFs in which investors choose the leverage multiple. One quick click, and it's gone. “ETFs are the new Investment Trusts (similar vehicles in 1920’s) that led to the Great Crash and will lead to the next crash.” ~Mark Yusko, CEO and CIO of Morgan Creek Capital Management “Passive investing is in danger of devouring capitalism. . . . What may have been a clever idea in its infancy has grown into a blob which is destructive to the growth-creating and consensus-building prospects of free market capitalism.” ~Paul Singer, founder and president of Elliott Management Corporation Miscellaneous Market Absurdities “Last time this mood took over, it ended very badly. Look at your investments with 2009 eyes. Did you tail hedge then? Should you risk up now?” ~Jeff Gundlach Recent initial public offerings (IPOs) get routinely flogged. SNAP’s 33 percent drop has become onomatopoetic. What would you expect for a company whose customer demographic is 12- to 18-year-olds with no income? GoPro (GPRO) has lost 95 percent in two years. A few more show precipitous drops from post-IPO highs: FIT, TWLO, FUEL, TWTR, ZNGA, and LC. Blue Apron (APRN) dropped 45 percent from its highs in the 36 days after its IPO. The company also cut 1,200 of a total of 5,000 jobs, prompting one veteran to ponder: “Seriously, how is that not illegal?” This is a new era, dude. The froth creeps into the screwiest places. The hard asset purchase of the year was the da Vinci painting of Salvatore Mundi that sold for $450 million. It was the only known da Vinci in private hands. A Modigliani nude sold for $170 million. A Basquiat painting purchased in 1984 for $19,000 moved across the auction block at a snot-bubble-blowing $111 million (23% compounded annualized return). The fabulously creative modern artwork, The Unmade Bed (Figure 13), sold for a cool $4 million.102 (I have one of those in my bedroom that I got for a lot less.) According to CBS News, a Harambe-shaped Cheeto sold for almost $100K on eBay.103 An obscure Danish penny stock company (Victoria Properties) surged nearly 1,000 percent in a few days, prompting management to remind investors that “there has been no change in Victoria Properties’ economic conditions. . . . The company’s equity is therefore still equal to about zero kroner.”104 Ford is valued at around $7,000 per car produced. Tesla is valued at $800,000 per car produced—they are literally making one model by hand on a Potemkin assembly line.105 A company called Switch has a “chief awesomeness officer.106 Ding! Ding! Ding! Figure 13. A $4 million masterpiece of modern art. Long-Term Real Returns and Risk Premia “Maybe it’s time to quietly exit. Take the cash, hide it in the mattress, and wait for the next/coming storm to pass.” ~Bill Blain, Mint Partners “People have just gotten so immune to any pain and anguish in any of these markets that when it happens it is going be very psychologically painful.” ~Marilyn Cohen, Envision Capital Management If the next correction is only 20–30 percent, I was simply wrong. Mete out a 50 percent or larger thwacking, and I am declaring victory (in a twisted sort of way). When the pain finally arrives, the precious few positioned to take advantage of the closeout sales will include idiots sitting in cash through the current equity binge buying (me). In theory, the short sellers would be in great shape too, but they all reside in shallow graves behind the Eccles Building. Some wise folks, like Paul Singer, have had the capacity and foresight to be raising billions of dollars for the day when monkey-chucking darts can find a target.107 "We think that there has never been a larger (and more undeserved) spirit of financial market complacency in our experience.” ~Paul Singer after raising $5 billion to buy distressed assets in the future There will be few victory laps, however, because boomers will be living on Kibbles ’n Bits. How painful will it be? Figure 14 from James Stack shows the fractions of the last 100 years’ bull markets that were given back.108 On only one occasion were investors lucky enough to hang onto three-fourths of their bull market gains. One-third of the bulls were given back entirely. Two-thirds of the bulls gave half back. The results are oddly quantized. How much will the next bear take back? It depends on how much the reasoning above is out of whack. Do ya feel lucky? Figure 14. Fraction of the bull taken by the bear.108 “The vanquished cry, but the victor doesn’t laugh.” ~Roman proverb Ethereal gains bring up an interesting point, more so than I first thought. In a brief exchange with Barry Ritholtz, I asserted that the “risk premia” on equities—the higher returns because of underlying risk—will be arbitraged away in the long run because occasionally risk turns into reality, and you get your ass kicked. I’m not talking inefficient high-frequency noise but rather the long term—call it a century if you will. With his characteristically delicate touch, Barry noted that I was full of hooey. Refusing to take any of his guff, I dug in. Certainly a free market would price equities much the way junk bonds are priced relative to treasuries to account for mishaps. Look back at Figure 14 in case it didn’t sink in. There is also the problem with interpreting index gains owing to survivor bias. Economist David Rosenberg claims that if the eight companies who left the Dow in April 2004 had remained, the Dow would still be below 13,000.109 Of course, presumably investors swapped them out as well if they were indexing (although somebody ate those losses). “I will get back to you next week with the answer to your singular investment question. Should you have further easy questions such as: is there a God and what gender he/she may be, that will necessarily be part of a separate email chain.” ~Brian Murdoch, former CEO of TD Asset Management on bonds versus stocks Start with the inflation-adjusted principle gains on the Dow (Figure 15), which returns less than 2 percent annualized. Think that’s too low? Take a look at my all-time favorite chart—the Dow in the first half of the 20th century, when inflation corrections weren’t needed (Figure 16). Now throw in some dividends (4 percent on average) and some wild-ass guesses on fees and taxes (including those on the inflated part of the gains). I get a real return on the Dow in the 20th century—a pretty credible century to boot—of only 4–5 percent annualized. Let’s adjust recent returns using the Big Mac inflation metric.110 Big Macs have appreciated sixfold since 1972 (4–5 percent compounded) with little change in quality. Over the same period, the capital gains on the Dow rose twentyfold. Adjusted for Big Mac–measured inflation, the Dow averaged less than 3 percent compounded (ex-dividends). An eightfold rise in the price of extra-large pizzas since 1970 (cited in my now-extinct blog for Elizabeth Warren) paints an even bleaker picture of inflation-adjusted S&P returns. Figure 15. Inflation-adjusted DOW. Figure 16. Non-inflation-adjusted Dow: 1900–1940. Those 4–5 percent inflation-adjusted equity gains do not account for the fourfold increase in the U.S. population, which should be included because the wealth of the nation was shared by four times as many carbon-based life-forms. The returns are also not in the same zip code as the 7–8 percent assumed by many pensioners. Back to the debate, the 4–5 percent inflation-adjusted equity gains contrast with 30-year treasuries returning about 4–5 percent nominally. Hmm...Seems like equities still won, and that Ritholtz appears to have been right. I consulted both digital and human sources (Brian Murdoch, Benn Steil, and Mark Gilbert), and everybody agreed: that punk Ritholtz was right. Even more disturbing, is it possible that Jeremy Siegel is not being a total meathead by asserting that you should buy equities at all times (BTFD)? The explanations for why markets fail to arbitrage the risk premia are said to be rather “mysterious.” According to Brian Murdoch, “academics have been remarkably unsuccessful in modeling it. . . . Despite three decades of attempts, the puzzle remains essentially intact.” Benn Steil concurred. Academic studies (warning!) claim that bonds do not keep up with stocks even over profoundly long periods, and no amount of fudging (fees, taxes, disasters, or survivor bias) accounts for the failure to arbitrage the marginal advantage of stocks to zero. Schlomo Benartzi and Richard Thaler suggest that short-term losses obscuring long-term gains—“myopic loss aversion”—is the culprit.111 (Ironically, I read this paper a week before the Nobel committee told me to read this paper.) Elroy Dimson et al. dismiss all the possible errors that could be root causes and put the sustainable risk premium on stocks at 3–5 percent.112 Let’s flip the argument: Why would you ever own a bond? There are rational answers. To the extent that you do not buy and hold equities for 100 years (unless you are Jack Bogle), you also pay a premium for the liquidity—the ability to liquidate without a huge loss because you were forced to sell into a swoon. You also forfeit the ability to sell into a rally, however, and certainly wouldn't want to sell into a bond bear market either. Of course, the role of financial repression—sovereign states’ ability to force bond yields well below prices set by free markets—could explain it all. Governments like cheap money and have the wherewithal to demand it. Maybe the message is to never lend to governments. I remain in an enlightened state of confusion. Gold “Gold is no more of an investment than Beanie Babies.” ~Gary Smith, economist “If you don’t have 5–10% of your assets in gold as a hedge, we’d suggest you relook at this. . . . [I]f you do have an excellent analysis of why you shouldn’t have such an allocation to gold, we’d appreciate you [sic] sharing it with us. ~Ray Dalio, Bridgewater Associates Ray is rumored to have ramped Bridgewater’s gold position fivefold this fall. He cites geopolitical risk as a reason to own the barbecued relic. “If we actually see missiles in the air, gold could go higher.” ~CNBC trader on thermonuclear war Since the early 1970s, gold has had an annual return of 8 percent (nominal). Gold bears are quick to point out it doesn’t pay interest. Nor does my bank, and by the way, what part of 8 percent don’t they understand? By that standard, the 8 percent gain in 2017 was good but not statistically unusual. Coin sales are down,113 which suggests that either retail buyers are not in the game or the bug-out plans of hedge fund managers—I’m told they all have them—are complete. Sprott Asset Management made a hostile move on the Central Fund of Canada, a gold–silver holding company, in a move that might portend promising future returns.114 “Significant increases in inflation will ultimately increase the price of gold. . . . [I]nvestment in gold now is insurance. It’s not for short-term gain, but for long-term protection. . . . We would never have reached this position of extreme indebtedness were we on the gold standard. . . . It wasn’t the gold standard that failed; it was politics. . . . Today, going back on to the gold standard would be perceived as an act of desperation.” ~Alan Greenspan, 2017, still babbling On the global geopolitical front, Deutsche Bundesbank completed repatriation of 700 tons of gold earlier than originally planned.115 The urgency may be bullish, but a possible source of demand is now gone. Chinese gold companies have been actively searching for domestic deposits and international acquisitions as they push to quadruple their reserves to 14,000 tons by 2020.116 (The U.S. sovereign stash is less than 9,000 tons.) The gold acquisitions of China (Figure 17) show a curious abrupt and sustained increase in activity in 2011. When did gold begin its major correction? Right: 2011. Makes you wonder if geopolitics somehow preempted the supply–demand curve. Because gold can leave Shanghai but not China, it’s a one-way trip. The Shanghai Gold Exchange must get its bullion from other sources. Russia continues to push its reserves up too. Rumors swirl that China and Russia are colluding for something grand, possibly a new global reserve currency based on the petro-yuan and gold. This would change the global landscape way beyond generic goldbuggery. Figure 17. Abrupt changes in Chinese gold acquisitions through Hong Kong in 2011. “Bringing back the gold standard would be very hard to do, but boy would it be wonderful. We’d have a standard on which to base our money.” ~Donald Trump, 2016 The gold market continues to be dominated by gold futures rather than physical gold. The bugs think this will end. I can only hope. In this paper market, gaming is the norm. On a seemingly monthly basis, gold takes swan dives as somebody decides to sell several billion-dollar equivalents (20,000–30,000 futures contracts) when the market is least liquid (thinly traded). Stories of fat-fingered trades abound, but I suspect these are just traders molesting the market for fun and profit, unconcerned that a regulator would ever call them on it. The silver market looked even creepier for 17 days in a row (Figure 18). I never trust that kind of linearity. Figure 18. Silver acting odd over 5 minutes and 17 days. Price changes often appear proximate to geopolitical events, but everything is proximate to a geopolitical event somewhere. India’s success at destroying its cash economy—the only economy it had—via the fiat removal of high-denomination bills117 was akin to announcing that only electric cars are legal starting next week. Some suggested that the move was also an attempt to flush gold out of households and into the banking system.118 Gold inched toward currency status at a more local level as Idaho, Arizona, and Louisiana voted to remove state capital gains taxes on gold—baby steps toward an emergent gold standard.119 The Brits are going the other way by banning salary payments in gold.120 Finishing with some fun anecdotes, a massive gold coin worth millions was stolen from a German museum.121 Some guy restoring a World War II tank found $2.5 million in gold bullion tucked in a fake fuel tank.122 A piano repairman discovered 13 pounds of gold in an old piano.123 According to British law, the repairman gets half, and the folks who donated the piano get squat. Beyond that, the gold market has been quiet for almost five years (Figure 19). Some wonder whether Bitcoin is sucking oxygen away from gold. Which way is gold gonna break if Bitcoin or the dollar tanks? Inquiring minds want to know. Figure 19. Five years of gold price discovery. Bitcoin “Worse than tulip bulbs. It won't end. Someone is going to get killed. . . . [A]ny [JPM] trader trading Bitcoin will be fired for being stupid. . . . [T]he currency isn’t going to work. You can’t have a business where people can invent a currency out of thin air and think the people buying it are really smart. It’s worse than tulip bulbs." ~Jamie Dimon, CEO of JPM Unbeknownst to Dimon, his daughter was trading Bitcoin: “It went up and she thinks she is a genius.” More to the point, traders at JPM were already firing up crypto exchanges (while Goldman and the CFTC seemed to be positioning to enter the game). Dimon decided it was a prudent time to STFU (shut up) by declaring, “I'm not going to talk about Bitcoin anymore.” The joke was on us, however; nobody seemed to notice that Dimon slipped in an earnings warning the same day his Bitcoin quotes hit the media.124 Well played, Jamie. “Bitcoin owners should appeal to the IRS for tax-exempt status as a faith-based organization.” ~Andy Kessler, former hedge fund manager I wish I had a Bitcoin for every time somebody asked me about it. Cryptos and goldbugs share a common interest in escaping the gaze of the authorities. My ignorance of blockchain technology is profound, but I suspect that is true for many who talk the talk. I wonder if somehow blockchain might play a role in bypassing the SWIFT check-clearing system used by Western powers to shake down opposition (Russia).125 I also wonder, however, if the miracles of blockchain should not be confused with those of Bitcoin. Any mention of price or gains below should be followed with an implicit "last time I checked" or even “as of two minutes ago.” My failure to jump on Bitcoin leaves no remorse: (a) I never take a position that risks a you-knew-better moment, and (b) I would have been flushed out, and then I really would have kicked myself. Recall the legendary founding shares in Apple that were sold for $800 and are now estimated to be worth maybe $100 billion?126 There’s rumor of a guy who lost his Bitcoin “codes” that are now estimated at more than $100 million. That’s real pain. I offer my current view of cryptos from a position of total technical ignorance guided by an only slightly more refined understanding of history and markets. Please forgive me, crypto friends. I know you are tired of hearing the counter arguments and the cat calling. I am restrained by the words of a famous philosopher: “Only God is an expert. We’re just guys paid to give our opinion.” ~Charles Barkley, former NBA star What would have flushed me out of a Bitcoin long position? Let’s take it to the hoop: The price action. Exponential gains, even wildly bent on a semi-log plot, have few analogs in history, all of which led to legendary busts (Figure 20). The South Sea bubble, Tulipmania, Beanie Baby, and Mentos-in-a-Coke analogies are legion. They all had a story that convinced many. Figure 20. One-year price chart of Bitcoin (as of 2 minutes ago). The participants. I have a friend—a very smart former Wall Street guy—who swears by it and is up 100,000 percent. You do not need to size your position correctly with that kind of gain. But then there is the clutch of camp followers emblematic of all manias. We have grad students speculating in Bitcoin. A 12-year-old bought his first Bitcoin in May 2011 with a gift from his grandmother.126a At more than $17,000 per coin, his stash is more than $5 million. On MarketWatch, he declared he had a price target of $1 million. “I’m obviously very bullish, but I expect to make a couple million dollars off very little money. This is the opportunity of a lifetime. Finance is getting its Internet.” ~Bitcoin investor Competitors. A Bitcoin competitor issued by Stratis soared to more than 100,000 percent since its initial coin offering (ICO) this past summer. As of December 1, there were 1,326 cryptocurrencies with a total market cap of >$400 billion.127 Paris Hilton has a cryptocurrency.128 The market is saturated more than the dot-com market ever was. It is a certainty that more than 99 percent will die much like most of the 270 auto companies in the ’20s and dot-coms in the ’90s. A site called Deadcoins shows that some already have.129 The debate is whether 100 percent is the final number. Volatility. Massive corrections followed by ferocious rallies akin to a teenager on driving on black ice would have convinced me it was too crazy for my style. Corrections last seconds to hours, with wildly enthusiastic buyers poised to BTFD. Isaac Newton got into the South Sea bubble, was smart enough to get out, and then reentered in time to go bankrupt. I am decidedly dumber than Isaac. Figure 21. Bitcoin photo bomber (acquiring $15K of Bitcoin via crowdsourcing). For Bitcoin to become a currency in its current form, out of reach of sovereigns, seems to require a society-upheaving revolution, which is a rare event that usually gives way to new, equally ham-fisted regimes. The chances seem slim to none for several reasons. “No government will ever support a virtual currency that goes around borders and doesn’t have the same controls. It’s not going to happen.” ~Jamie Dimon (again) The competition. I am doubtless that central banks and sovereign states will never endorse Bitcoin in its current form. They have their own digital currencies and a monopoly on the power to create more, and they commandeer our assets through taxation. Existential risk will bring on the power of the State. When sovereigns decide to do battle, the cryptos will be brought to heel or forced underground. Instabilities. Digital currencies are showing digital instabilities that could just be growing pains or evidence of more systemic problems. How software buffs who know that software is duct tape and bailing wire could think that a software-dependent currency is invincible is beyond me. Ethereum dropped 20 percent in a heartbeat when a hacker theft was reported.130 It dropped 96 percent after the Status ICO clogged the network.131 One user put a stop-loss on Ethereum at $316 on GDAX, which executed at $0.10 during a flash crash.132 So-called “wallets” have been freezing up, although there is some debate as to whether the owners lost the Bitcoins.133 This stuff happens with all risk assets now but not with usable currencies. Volatility. Nobody will use a currency to pay for groceries if prices move 10 percent a day or even 5 percent as you move from the frozen food to the vegetable aisle. This, by the way, is the same explanation for why I don’t consider gold “money” or a “currency.” As long as there exists a Bitcoin–dollar conversion, a sovereign wishing to keep Bitcoin in the realm of a speculative plaything could use its unlimited liquidity to trigger price swings with a little day trading. Legality. If up against the wall, sovereigns will use arguments about fighting crime, stemming ransomware, or controlling monetary policy and declare a War on Cryptos akin to the potential War on Cash. China has already blown shots across the Bitcoin bow by shutting down exchanges as well as ICOs as they struggle with excessive sovereign debt and capital outflows.134 Britain has also done some sabre rattling.135 The IRS has declared gains taxable (akin to gold) and is paying companies to locate digital wallets.136 The fans of BTC declare invincibility—freedom! The average blokes may smoke pot and drive too fast, but they seem less likely to risk a spat with the State on this stuff. “Right now the trust is good—with Bitcoin people are buying and selling it, they think it’s a reasonable market—but there will come a day when government crackdowns come in and you begin to see the currency come down.” ~Mark Mobius, executive director at Franklin Templeton Investments Others have unshakeable faith even in the more obscure cryptocurrencies. I’m unsure what I’m hoping for on this bet (Figure 22): Figure 22. John McAfee, technology pioneer, chief of cybersecurity, visionary of MGT Capital Investments, going all in on cryptocurrencies. Housing and Real Estate “We bailed out the financial system so that financiers with access to cheap credit can buy up all of America’s real estate so that they can then rent it back to you later.” ~Mike Krieger, Liberty Blitzkrieg blog Greenspan claimed those who predicted the housing bubble were “statistical illusions” (as were those who saw Greenspan as a charlatan). There are, once again, housing bubbles littered across the globe at various stages of expansion and contraction owing to central banks providing in excess of $3 trillion dollars of QE this year. Credit is fungible, so the flood of capital can come from anywhere and migrate to anywhere it finds an inflating asset. Hong Kong’s spiking prices are rising by dozens of basis points per day. Attempts by authorities to cool the market only fanned the flames, resulting in “a sea of madness.”137 Australian authorities tried to cap the dreaded interest-only loans at 30% of the total pool, prompting one hedge fund to return money to investors and declare that “Mortgage fraud is endemic; it’s systemic; it’s just terrible what’s going on. When you’ve got 30-year-olds, who have never seen a property downturn before, borrowing up to 80% to buy three and four apartments, it’s a bubble.”138 Prices in London are now collapsing.139 Why would anything collapse with so much global credit? Simple: top-heavy structures tend to collapse from even small shocks. I will focus, however, on only two countries—the U.S. because it is my home turf and Canada because it is the most interesting of the markets. The U.S. appears to be in a bubblette, an overvalued market that does not approach the insanity of 2007 (detected by statistical illusions as early as 2002).140 Twenty percent down payments have become passé again. A survey of 20 cities reveals 5.9 percent annualized price rises.141 The median sale price of an existing home has set an all-time high and is up 40 percent since the start of 2014141 despite what seems to be muted demand (Figure 23). Thus, home ownership has dropped by 8 percent since ’09 because soaring prices have rendered them unaffordable. More than 40 percent of 25-34 year olds, a group historically en route to home ownership, have nothing set aside for a down payment.141 Those who scream about the need for affordable housing don’t notice that we have plenty of low-quality houses. We lack low-cost houses. And the Fed says inflation is good. Figure 23. Median new home sales price in the U.S. versus number sold and versus home ownership rate. In 1960, California had a median home price of $15,000—three times the salary of an elementary school teacher.142 The median home price in San Francisco is now $1.5 million,143 which is unlikely to be three times a teacher’s salary. A couple earning $138,000 will soon qualify for subsidized housing in San Francisco. California housing seems to be interminably overvalued, possibly owing to the draw of droughts, mudslides, crowds, and, fires. Despite modest 6 percent population growth since 2010, housing units have shown an only 2.9 percent increase. There could be a supply–demand problem, especially when the fires subside. Florida is rumored to have eager post-hurricane sellers—those with something left to sell, that is.144 Condo flippers drove prices skyward in Miami, but they are heading earthward with a glut of units scheduled to come online in 2018. It’s not just the sand states starting to see softness. In New York City, rising rates seem to be nudging commercial and residential real estate down and foreclosures up to levels not seen since the 2009 crisis (79 percent year-over-year in Q3).145 Sam Zell is, once again, a seller and claims "it is getting hard."146 Recall that Zell nailed the real estate top by selling $38 billion in real estate in ’07.147 “The condo market at the high-end [in Manhattan] . . . is a catastrophe and will get worse.” ~Barry Sternlicht, Starwood Property Trust Those who already own houses can once again “extract equity” from their homes using home equity lines of credit (HELOCs).148 They then wake up with more debt on the same house. Pundits claim consumers’ willingness to mortgage their future is “a healthy confidence in the economy.” Fannie Mae and Freddie Mac have also entered phase II of the catch-and-release program. Their regulators have authorized them to once again engage in unchecked, reckless lending, prompting some to begin estimating the cost of the next bailout.149 What happened to all that inventory from the colossal boom leading to the Great Recession? Some fell into the foundations, but a lot found its way into private equity firms. Mind you, single-family rentals are a low- or no-profit-margin business under normal circumstances. As long as rates stay low—Where have I heard that one before?—inherently thin profits can be amplified to a significant transitory revenue stream through leverage. A proposed merger of Invitation Homes (owned by Blackstone Group) and Starwood Waypoint Homes (owned by Starwood Capital) would spawn the largest owner of single-family homes in the United States with a portfolio worth over $20 billion.150 Of course, rates will rise again, and these sliced-and-diced tranches of mortgage-backed securities must be offloaded to greater fools. Private equity guys are already frantically boxing and shipping.151 To avoid costly and time-consuming appraisals, market players are using “broker price opinions,” which can be had by simply driving by the house and taking a guess (or just taking a guess). In ’09, the legendary “Linda Green” signed off on thousands using dozens of different signatures.152 U.S. securities regulators are investigating whether bonds backed by single-family rental homes and sold by Wall Street’s biggest residential landlords used overvalued property assessments.153 Let me help you guys out: yes. “The main risk on the domestic side is a sharp correction in the housing market that impairs bank balance sheets, triggers negative feedback loops in the economy, and increases contingent claims on the government.” ~IMF, on the Canadian housing market Heading north, we find that Canada’s real estate market never collapsed in ’09 (Figure 24), an outcome often ascribed to the virtues of the country’s banking system. An estimated 7 percent of Canadians work in housing construction,154 and Canadians are using HELOCs like crazy.155 After Vancouver tried to burst a huge bubble in 2016 with a 15 percent buyers’ tax,156 Chinese buyers chased Toronto houses instead. Annualized gains of 33 percent with average prices of $1.5 million are pushing even the one-percentile crowd to remote ’burbs.157 Toronto authorities have now imposed the Vancouver-like 15 percent foreign buyers tax,158 causing a single-month 26 percent drop in sales and ultimately chasing the hot money to Montreal,159 Guelph, and even Barrie.160 “Make no mistake, the Toronto real estate market is in a bubble of historic proportions.” ~David Rosenberg Figure 24. Canadian versus U.S. median home prices and what they buy ($700,000 for that little gem). The most interesting plotline and a smoking gun in Canada’s bursting bubble was failing subprime lender Home Capital Group (HCG). Marc Cahodes, referred to as a “free-range short seller” and “the scourge of Wall Street,” spotted criminality and shorted HCG for a handsome profit.161 HCG was so bad it was vilified by its auditor, KPMG.162 Imagine that. HCG dropped 60 percent in one day when news hit of an emergency $2 billion credit line at 22.5 percent interest by the Healthcare of Ontario Pension Plan.163 (The CEO of the pension plan sits on Home Capital’s board and is also a shareholder.) Cahodes was printing money and ranting about jail sentences when, without warning, the legendary stockjobber Warren Buffett took a highly visible 20 percent stake in HCG at “mob rates” (38 percent discount).164 The short squeeze was vicious, and Cahodes was PO’d. As Paul Harvey would say, “now for the rest of the story.” HCG is, by all reckoning, the piece of crap Cahodes claims it is. Buffett couldn’t care less about HCG’s assets—Berkshire can swallow the losses for eternity. Warren may have bought this loser as a legal entry to the Canadian banking system, which is loaded with hundreds of billions of “self-securitized” mortgages. The plot thickened as a story leaked that Buffett met with Justin Trudeau (on a tarmac).165 When the Canadian real estate bust begins in earnest, Buffett will have the machinery of HCG and the political capital to feed on the carcasses of the big-five Canadian banks. Pensions “This massive financial bubble is a ticking time bomb, and when it finally goes off, it is going to wipe out virtually every pension fund in the United States.” ~Michael Snyder, DollarCollapse.com blog The impending pension crisis is global and monumental with no obvious way out. The World Economic Forum estimates the pension gap—unfunded pension liabilities—at $70 trillion and headed for $250 trillion by 2050.166 Conservative but still conventional assumptions about prospective investment returns and spending patterns in old age suggest that retiring into the American dream in your mid 60s requires you bank 20–25 multiples of your annual salary (or a defined benefit plan that is the functional equivalent) to avoid the risk of running out of money. A friend—a corporate executive no less—retired with 10 multiples; he could be broke within a decade (much sooner if markets regress to historical means). Of course, you can defiantly declare you will work ’till you drop, but then there are those unexpected aneurysms, bypass surgeries, layoffs, and ailing spouses needing care. I’ve seen claims that more than 50 percent of retirees do not fully control their retirement age. “Companies are doing everything they can to get rid of pension plans, and they will succeed.” ~Ben Stein, political commentator The problem began as worker compensation became reliant on future promises—IOUs planted in pension plans—often assuming the future was far, far away. However, a small cadre of demographers in the ’70s smelled the risk of the boomer retirements and began swapping defined-benefit plans for defined-contribution plans.167 (A hybrid of the two traces back to 18th century Scottish clergy.168) The process was enabled by the corporate-friendly Tax Reform Act of ’86.169 Employees were unknowingly handed all the risk and became their own human resource specialists. Retirement risk depends on the source of your retirement funds. Federal employees are backstopped by the printing press, although defaults cannot be ruled out if you read the fine print.170 States and municipalities could get bailed out, but there are no guarantees. Defined-benefit corporate plans can be topped off by digging into cash flows provided that the cash flows and even the corporation exist. The depletion of corporate earnings to top off the deficits, however, will erode equity performance, which will wash back on all pension funds. The multitude of defined-contribution plans such as 401(k)s and IRAs managed by individuals are totally on their own and suffer from a profound lack of savings. Corporate and municipal defined-benefit plans assumed added risks by falling behind in pension contributions motivated by efforts to balance the books and, in the corporate world, create the illusion of profits. The moment organizations began reducing the requisite payments by applying flawed assumptions about prospective returns, pensions shifted to Ponzi finance. My uncanny ability to oversimplify anything is illustrated by the imitation semi-log plot in Figure 25. The red line reflects the assumed average compounded balance sheet from both contributions and market gains. The blue squiggle reflects the vicissitudes of the market wobbling above and below the projection. If the projections are too optimistic—the commonly reported 7–8 percent market returns certainly are—the slope is too high, and the plan will fall short. If the projected returns are reasonable but management stops contributing during good times—embezzling the returns above the norm to boost profits—the plan will fall below projection again. Of course, once the plan falls behind, nobody wants to dump precious capital into making up the difference when you can simply goose projected returns with new and improved assumptions. In a rational world, pensions would be overfunded during booms and underfunded during busts. Assuming we can agree that we are deep into both equity and bond bull markets and possibly near their ends, pensions should be bloated with excess reserves (near a maximum on the blue curve), and bean counters should keep their dirty little paws off those assets and keep contributing because we won’t stay there. Figure 25. Childish construct of pension assets. That’s a good segue to drill down into the contemporaneous details. Public pensions are more than 30 percent underfunded ($2 trillion).171 A buzzkiller at the Hoover Institution says that the government disclosures are wrong and puts the deficit at $3.8 trillion.172 Bloomberg says that “if honest math was being used . . . the real number would actually be closer to 6 trillion dollars.”173 What is honest math? Using prevailing treasury yields for starters. Bill Gross—the former Bond King—says that if we get only 4.0 percent total nominal return rather than the presumed 7.5 percent, pensions are $5 trillion underfunded.174 Assuming 100 million taxpayers, that’s $50,000 we all have to pony up. California’s CalPERS fund dropped its assumption to a 6.2 percent return—still seriously optimistic in my opinion—leaving a $170 billion shortfall.175 The Illinois retirement system is towing a liability of $208 billion with $78 billion in assets ($130 billion unfunded).176 Connecticut is heading for a “Greece-style debt crisis” with $6,500 in debt per capita (every man, woman, and child?).177 The capital, Hartford, is heading for bankruptcy.178 South Carolina’s government pension plan is $24 billion in the hole. Kentucky’s attempt to fill a gigantic hole in its pension fund (31 percent funded) was felled by politics.179 A detailed survey of municipal pension obligations shows funding ranging from 23 percent (Chicago) to 98 percent (Suffolk).180 My eyeball average says about 70 percent overall. Notice that despite being at the peak of an investment cycle, none are overfunded (Figure 26.) Large and quite unpopular 30 percent hikes in employee contributions are suggested. The alternative of taking on more municipal debt to top off pension funds is a common stop-gap measure of little merit long term; somebody still has to pay. Figure 26. State pension deficits. The 100 largest U.S. corporate defined-benefit plans have dropped to 85 percent funded from almost 110 percent in 2007. During the recent market cycle that burned bright on just fumes, the companies gained only 6 percent above the 80 percent funding at the end of 2008. Of the top 200 corporate pensions in the S&P, 186 are underfunded to the tune of $382 billion (Figure 27). General Electric, for example, is $31 billion in the hole while using $45 billion for share buybacks. Figure 27. Underfunding of 20 S&P pension funds. When are serious problems supposed to start, and what will they look like? Jim Bianco says “slowly and then suddenly.” Some would argue “now.” The Dallas Police and Firemen Pension Fund is experiencing a run on the bank.181 They are suing a real estate fund who slimed them out of more than $300 million182 and are said to be looking at $1 billion in “clawbacks” from those who got out early trying to avoid the pain.183 The Teamsters Central States and the United Mineworkers of America plans are failing.184 The New York Teamsters have spent their last penny of pension reserves.185 The Pension Benefit Guaranty Corporation has paid out nearly $6 billion in benefits to participants of failed pension plans (albeit at less than 50 cents on the dollar), increasing its deficit to $76 billion. CalPERS intends to cut payouts owing to low returns and inadequate contributions (during a boom, I remind you). “The middle 40% [of 50- to 64-year olds] earn $97,000 and have saved $121,000, while the top 10% make $251,000 and have $450,000 socked away.” ~Wall Street Journal Looks like those self-directed IRAs aren’t working out so well either. Two-thirds of Americans don’t contribute anything to retirement. Only 4 percent of those earning below $50,000 a year maxes out their 401(k)s at the current limits.186 They are so screwed, but I get it: they are struggling to pay their bills. However, only 32 percent of the $100,000+ crowd maxes out the contribution. When the top 10 percent of the younger boomers have two multiples of their annual salary stashed away, you’ve got a problem.186 If they retired today, how long would their money last? That’s not a trick question: two years according to my math. Half the boomers have no money set aside for retirement. A survey shows that a significant majority of boomers are finding their adult children to be a financial hardship.187 Indeed, the young punks aren’t doing well in all financial categories; retirement planning is no exception. Almost half of Gen Xers agreed with this statement: “I prefer not to think about or concern myself with retirement investing until I get closer to my retirement date.” Moody’s actuarial math concluded that a modest draw down would cause pension fund liabilities to soar owing to a depletion of reserves.188 There is a bill going through Congress to allow public pensions to borrow from the treasury; they are bracing for something.189 This is a tacit bailout being structured. The Fed cowers at the thought of a recession with good reason: Can the system endure 50% equity and bond corrections—regressions to the historical mean valuation? What happens when monumental claims to wealth—$200 trillion in unfunded liabilities—far exceed our wealth? Laurence Kotlikoff warned us; we are about to find out.190 Beware of any thinly veiled claim that the redivision of an existing pie will create more pie. My sense is that we are on the cusp of a phase change. Stresses are too large to ignore and are beginning to cause failures and welched promises. Runs on pension funds akin to runs on banks would be deadly: people would quit working to get their pensions. At this late stage in the cycle, you simply cannot make it up with higher returns. Enormous appreciation has been pulled forward; somebody is going to get hosed. It’s only fourth grade math. Bankruptcy laws exist to bring order to the division of limited assets. We got into this mess one flawed assumption at a time. On a final note, there is a move afoot to massively reduce contributions to sheltered retirement accounts. This seems precisely wrong. (I have routinely sheltered 25–30 percent of my gross income as a point of reference.) Congress is also pondering new contributions be forced into Roth-like accounts rather than regular IRAs. I have put a bat to the Roth IRA both in print191 and in a half-hour talk.192 Here is the bumper sticker version: Roth IRAs pull revenue forward, leaving future generations to fend for themselves; Fourth grade math shows that Roth and regular IRAs, if compounded at the same rate and taxed at the same rate, provide the same cash for retirement. Roth IRAs are taxed at the highest tax bracket—the marginal rate—whereas regular IRAs are taxed integrated over all brackets—the effective tax rate. If you read a comparison of Roth versus regular IRAs without reference to the “effective” versus “marginal” rate, the author is either ignorant or trying to scam you. Phrases like “it depends on your personal circumstances” are double-talk. This synopsis of a Harvard study has two fundamental errors: Can you find them? “If a worker saves $5,000 a year in a 401(k) for 40 years and earns 5% return a year, the final balance will be more than $600,000. If the 401(k) is a Roth, the full balance is available for retirement spending. If the 401(k) is a traditional one, taxes are due on the balance. Let’s say the person’s tax rate is 20% in retirement. That makes for a difference of $120,000 in spending power, which a life annuity will translate into about $700 a month in extra spending.” ~John Beshears, lead author of a Harvard study Inflation versus Deflation “Deflation does not destroy these resources physically. It merely diminishes their monetary value, which is why their present owners go bankrupt. Thus, deflation by and large boils down to a redistribution of productive assets from old owners to new owners. The net impact on production is likely to be zero.” ~Guido Hülsmann. Mises Institute “My own view is that we should be cautious about tightening policy further until we are confident inflation is on track to achieve our target.” ~Lael Brainard “Inflation is a tax and those least able to afford it generally suffer the most.” ~Esther George, president and CEO of the Federal Reserve Bank of Kansas City “Barring major swings in value of the dollar, inflation is likely to move up to 2 percent over the next couple of years.” ~Janet Yellen, Federal Open Market Committee chair Barring major swings in the value of the dollar? What kind of circular reasoning is that? The Fed tells us inflation is too low relative to their arbitrary 2 percent target. I say they are lying—through their teeth—and I have company. John Williams of ShadowStats has been ringing the alarm for decades, currently putting inflation at 6 percent compared with official numbers of less than 2 percent (Figure 28).193 A study by the Devonshire Group concurs with Williams.194 The most notable support for the official consumer price index (CPI) inflation numbers comes from MIT’s Billion Prices Project (BPP).
Standing in contrast to dark brick luxury flats, the glass citadel aims to be a benign fortress that is part of a wider rejuvenation of ‘Knightsbridge of the South’Yew hedges containing steel bollards, ditches deep enough to stop a truck and a reflecting pool that doubles as a defensive moat are some of the anti-terrorist measures built into the rolling landscape of the new US embassy in south-west London, a $1bn (£750m) glass citadel that aims to be fortress without walls.The astonishing array of “hostile vehicle mitigation” paraphernalia that surrounds the two-hectare site in Nine Elms is still being covered with bushes and disguised with benches, as the building prepares for its grand opening in January – whether Donald Trump’s state visit happens or not. “An invitation has been sent, and we look forward to receiving the president here when he can make it,” is all US ambassador Woody Johnson will say on the matter. Continue reading...
Выдержки из книги "Кванты. Как волшебники от математики заработали миллиарды долларов", посвящённые трейдеру Михаилу Малышеву. Он не является главным персонажем книги, упоминается редко, но всё равно очень интересно. --- Гриффин потихоньку строил высокочастотную трейдинговую машину, которая в один прекрасный день станет жемчужиной в короне Citadel и главным соперником PDT и фонда Medallion компании Renaissance. В 2003 году он нанял русского математического гения по имени Михаил Малышев, чтобы тот поработал над засекреченным проектом в области статистического арбитража. Поначалу дело шло туго и получить прибыль было нелегко. Но 25 июля 2004 года трейдинговая машина, получившая название Tactical Trading (тактический трейдинг), рванула с места в карьер и с каждым днем только улучшала результаты. С этого момента подъем почти никогда не прекращался. Прибыли были огромны, волатильность низка. Малышев ставил скорость во главу угла, используя запредельную компьютерную мощь Citadel, чтобы опередить конкурентов в гонке за ускользающими арбитражными возможностями на фондовом рынке. --- Следующий абзац описывает август 2007 года. Это время душераздирающих убытков у множества алгоритмических фондов. Кен Гриффин тем временем, как акула, почуял запах крови в воде. Алгоритмический фонд Tactical Trading, которым управлял Михаил Малышев, нес большие потери, но он был всего лишь звеном массивной цепи Citadel. --- Тем временем мощный высокочастотный механизм Citadel, фонд Tactical Trading, которым управлял русский математический гений Михаил Малышев, приносил прибыли, несмотря на потрясения, постигшие квантов в августе. Он должен был заработать в общей сложности 892 миллиона долларов за 2007 год, а в следующем году и того больше. Citadel Derivatives Group, группа по торговле опционами, которой заправлял Мэтью Андресен, тоже получала неплохую прибыль и стала крупнейшим опционным маркет-мейкером в мире. --- Кризис продолжается. Описаны события 2008 года. «Каждый день появляется новый слух о том, что Citadel выходит из бизнеса», – сказал своим клиентам во время телеконференции Марк Юско, менеджер Morgan Creek Capital Management из Северной Каролины, инвестора Citadel. В самой компании все это время сотрудники работали на износ. Посетители отмечали, что у трейдеров темные круги под глазами, а сами глаза красные. Трехдневная щетина, ослабленные, залитые кофе галстуки. Когда поползли слухи о ситуации в Citadel, на трейдеров обрушился шквал звонков с вопросами, начали ли представители Федерального резерва инспектировать их помещения. В какой-то момент один из сотрудников вышел из себя и крикнул в трубку: «Извините, но я тут никаких федералов не вижу». Другой саркастично заметил: «Я только что посмотрел под столом, никого тут нет».Бисон тем временем взял на себя руководящие функции, пока Citadel нес все большие убытки. Он включил режим контроля ущерба, постоянно мотался между Чикаго и Нью-Йорком, встречаясь с недовольными партнерами, и старался убедить их, что у Citadel достаточно капиталов, чтобы пережить бурю. Трейдеры как сумасшедшие сбрасывали активы, чтобы получить больше денег и снизить леверидж.По рассказам очевидцев, в какой-то момент, пока собственный капитал Kensington продолжал падать, Citadel организовал кредит в 800 миллионов долларов из одного из собственных фондов — высокочастотной машины Tactical Trading, которой управлял Михаил Малышев. Tactical Trading отсоединился от головной компании в конце 2007 года. Инвесторы, узнав об этом странном ходе, приняли его за шаг отчаяния и решили, что компания действительно на грани: если им приходится самим себе одалживать денег, значит, больше никто им кредита не дает. ---Мир высокочастотного трейдинга попал в объективы средств массовой информации в июле 2009 года, когда Сергей Алейников, только что уволившийся из Goldman Sachs, где писал код, приземлился в аэропорту Ньюарк Либерти, прилетев из Чикаго. Там его ждали агенты ФБР. Алейников был арестован и обвинен в хищении кода тайной группы высокочастотного трейдинга Goldman. Он оспаривал обвинение в суде. Добавьте сюда связь с мощным алгоритмическим хедж-фондом в Чикаго: Citadel. Алейников только что принял предложение о работе в Teza Technologies – фонде, недавно основанном Михаилом Малышевым, который в Citadel управлял чрезвычайно прибыльным Tactical Trading. За шесть дней до ареста Алейникова Citadel подал в суд на Малышева и нескольких его коллег – также бывших сотрудников, – утверждая, что они нарушили соглашение о запрете конкуренции, а также могли воровать код. Подсудимые все отрицали. Процесс показал многие доселе не известные подробности относительно сверхбыстрой системы трейдинга Citadel. Офисы Tactical Trading, для доступа в которые требовался специальный код, были оборудованы видеокамерами. Повсюду стояли охранники. Фонд старался исключить возможность кражи секретной информации. Компания потратила миллионы, годами разрабатывая коды, и теперь утверждала, что Малышев и его пособники угрожали инвестициям. Кроме того, в суде обнаружилось, что Tactical – машина по производству денег, заработавшая в 2008 году более 1 миллиарда, выигрывая на волатильности рынка, когда хедж-фонды Citadel потеряли около 8 миллиардов.
Эта модель смартфона в металлическом корпусе получила модный форм-фактор с "высоким" дисплеем. Другой важной "фишкой" стало наличие двух сдвоенных -- основной и фронтальной -- камер. Чтобы поставить точку над "i", Вести.Hi-tech отыскали у Huawei Nova 2i не только плюсы, но и минусы.
Submitted by Rudy Havenstein After years of seeing terrible market news and commentary, I’m pretty jaded, but when I saw the recent Marketwatch op-ed, “Janet Yellen’s true legacy is her focus on middle-class wages” (by Tim Mullaney), I thought such nonsense needed a reponse that went beyond 280 characters. (Half of Mullaney’s article is an anti-Trump rant, which is fine, and which I will ignore). "If something is nonsense, you say it and say it loud."– Nassim Taleb The article’s tagline, “Outgoing Federal Reserve chairwoman is a true populist, representing the interests of ordinary people”, reflects an Orwellian perversion of language that is so common today, a bizarro land where “inflation” is “growth”, “debt” is “wealth,” “QE” is “economic stimulus,” and “plutocracy” is “populism”. Janet Yellen heads what is arguably the most anti-populist entity on Earth. It’s a very strange world we live in, where the actions of the head of a private bank cartel are declared to be “populist” by countless econ professor cultists and their media acolytes, as average Americans stand in stunned amazement at the elites’ cluelessness. So what is “populism”? I asked Google, which hopefully excluded any Russian propaganda from the answer: Ok, I don’t know about you, but reading that I immediately thought “That’s Janet Yellen.” (I would prefer for this article to be about someone truly evil, like Alan Greenspan or Tim Geithner, as I’ve always thought of Yellen as more of a caretaker, a bit like Bruce Dern in Silent Running.) This ridiculous idea of the Fed as “populist” is not a new phenomenon. You have, for example, Canadian humor magazine Macleans back in 2014: And none other than noted hairdresser Paul McCulley said this recently: [You may remember Paul McCulley as the guy who said in 2002 (to cat afficianado Paul Krugman’s glee), “Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.” So how’d that work out for the average American? ] Mullaney writes: We hear a lot about populism these days, a political philosophy the dictionary says is about a party or faction “seeking to represent the interest of ordinary people.” And that’s what Yellen did as Fed chair…. Really? I suppose it’s fitting that a day after the Marketwatch propaganda dropped, the @FedHistory account tweeted this: (As an aside, I ruined the #FedHistory hashtag for the Fed, but that’s another topic.) Ok, so Aldrich…Aldrich…rings a bell. Oh yeah… So who were these founding populists, “seeking to represent the interest of ordinary people,” who assembled on Jekyll Island? Clearly these were the Joe Six-Packs of the day. The “duck hunt” ruse was due to the incredible secrecy regarding the Federal Reserve’s formation: Apparently the founders of the Fed weren’t committed to the “transparency” we have today, where, for example, Fed meeting transcripts are released after a 5-year lag, presumably to give the statutes of limitations time to expire. (Another canard is that the Fed is “independent”, which apparently it is from a corrupt, feckless Congress, but hardly from Citadel, Barclay’s, Pimco, Goldman, Citigroup, JPMorgan or Warburg Pincus, but I digress.) So why such secrecy if these populists were just there to “represent the interest of ordinary people”? Surely the public would have supported the two main reasons these men formed the Fed, to stifle competition and arrange for the socialization of bank losses? I mean, to mandate price stability and stable employment? Father of the Fed Paul Warburg tries to explain: So, um…even a century ago the populace had “a deep feeling of fear and suspicion with regard to Wall Street’s power and ambitions.” Maybe for good reason, then as now. Upton Sinclair, in his 1927 novel “Oil!” (an inspiration for the film “There Will Be Blood”), happens to give a very good description of the Federal Reserve: Clearly, Mullaney sees Janet as a different animal than the founders of her cartel: “…she held interest rates low enough, for long enough, that consumers’ debt-service burdens reached 20-year lows while real household incomes recovered all of the ground lost in the recession and moved toward all-time highs.” As is typical of Fed cheerleaders, all credit for any recovery goes to the Fed, and no blame for the preceding bubble and collapse. The heroic arsonist helped put out the fire! I will concede that Yellen’s Fed did oversee lowering rates to prehistoric levels, and also induced massive additional consumer borrowing. The “debt burden”may be low now, but God help the poor debtors if rates ever return to anywhere close to average historical levels (not to scare you, but that’d be around a 5% Fed Funds Rate). Of course, by then Yellen will be long gone, giving $500k speeches (inflation, you know), collecting her COLA-adjusted pensions and perhaps muddying the minds of another generation of Berkeley undergrads. She’ll be fine. So yes, low rates are awesome, but while Citigroup (which should not exist) et al. may be able to borrow at 0%, still NO ZIRP FOR YOU! As for real incomes, I do hope we can someday get back to Nixon-era levels. To Marketwatch Tim, Janet Yellen is some sort of mythical figure, able to single-handedly create jobs, hike wages, and ameliorate the consumer debt burden. This of course is nonsense. First of all, look at Janet Yellen’s resume: Other than perhaps some hiring at the Fed and the Berkeley econ department, it is hard to imagine any jobs that Ms. Yellen herself actually created. Maybe she hired someone to garden her yard, and that’s commendable, but Yellen strangely believes that without formerly-tenured econ professors running things (to borrow from Jim Grant), the US economy would collapse: “Will capitalist economies operate at full employment in the absence of routine intervention? Certainly not.”- Janet Yellen, 1999 This is a rather laughable statement coming from someone who won the 2010 NABE “Adam Smith Award”. So how the heck did US unemployment drop to 5% in 1900 without a former Berkeley econ professor to guide it? How did it even get as low as 4% in 1890 with no FOMC? I guess it’s a mystery. Speaking of Adam Smith, he described the folly of Janet’s position well in “The Wealth of Nations”: The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it. Anyway, academia has been very good to Yellen, as her 2010 financial disclosure report shows. This report shows, among many other things at the time, over $21,000 a month just in University of California pension income, “$500k-$1M” in her Heartland 500 Index fund IRA and a $50,000 “honorarium” from Chinese internet company Netease. No doubt she can also look forward to many days of giving $250,000 speeches to those who most benefited from her largesse. Having such a huge income (at least relative to the median US wage earner, who makes $30,557 a year) no doubt factors into Yellen’s fervent desire to spike the cost of living for the peasants. Throwing in Janet’s $200k Fed salary, a very conservative estimate puts Yellen’s annual income in the top 99.9% of all Americans. Quite literally, Janet Yellen is the 0.1%. (To be fair, the Fed pays its staff very well, which is probably a side-effect of being able to create currency at will). Yellen has served her 0.1% well. Besides the Fed’s latest mandate, the booming S&P 500 index, and a 4.1% unemployment rate (which, if accurate, would mean Trump would never have been elected), Yellen oversees a nirvana where American wealth inequality is now at record levels on her watch, even worse than Russia or Iran(!!), with the top 1% now owning 38.5% of everything! Yay! A few more examples: The CEO-to-worker compensation ratio is at 224-to-1 in 2016, up from 22.5 back in 1973, millennials live with their parents at unprecedented historical levels (largely because Fed and government policies have made house prices far higher than they would otherwise be), and Americans are more burdened by student loan debt than ever. I won’t even mention subprime auto delinquencies. All this is in the 9th year of our incredible global synchronized recovery! (What happens if there’s ever another recession, which of course there can’t be?) Then there are the senior citizens who have been destroyed by ZIRP and inflation (which Yellen thinks is too low): These seniors’ economic woes may explain why the elderly are the only demographic group with a rising labor force participation rate since 2000. Would you like fries with that? Meanwhile, the populist owners of the Federal Reserve are doing great Moreoever, the Fed’s real claim to fame since 2009, the stock market’s “wealth effect” (also known as “trickle down”) is lost on the 70% of Americans who make less than $50k and are not benefitting from the Fed casino. "There is absolutely no econometric evidence that there is a wealth effect except for a very slim slice of our highest wealth individuals."Lacy Hunt (I will, out of kindness, refrain from mentioning that In the pre-Fed Panic of 1907, the Dow fell 48.5% from its all-time high, while in the Fed-mentored Panic of 2008-2009, the Dow fell 54.4%.) Everything the Fed has done this century has been designed to get Americans into more debt, and most importantly to protect the (global) too-big-to-fail money-center banks. Everything else is secondary. Just one example of this reality is when a “lightbulb went on” for Neil Barofsky, the Special Inspector General of the TARP: There you have populist Yellen’s Fed in a nutshell: it’s all about the banks. (Note that “Turbo” Tim Geithner, former tax scofflaw, NY Fed President during the height of TBTF bank fraud, AIG-creditor savior, US Treasury Secretary, and overall weasel, is now being rewarded as President of Warburg Pincus). The Federal Reserve and Janet Yellen, despite the magical thinking of the Fed’s many media shills, are no more “populist” than JPMorgan Chase or Lloyd Blankfein. If the Fed ever happens to help “the average American” through some action, it’s by accident, and there is plenty of evidence that the average American has not only not recovered from Great Depression II, but is actually worse off in real terms. Time to wake up. “Ever get the feeling you've been cheated?”Johnny Rotten
Authored by Mike Krieger via Liberty Blitzkrieg blog, The financial crisis of 2008/09 was the most significant event to happen in my lifetime. That event, coupled with the deeply unethical and corrupt response to it, led to a direct delegitimization of governments and institutions worldwide. It’s precisely this self-inflicted destruction of credibility which opened up the window for the birthing of a new monetary and financial system in the wake of Bitcoin’s emergence in early 2009. Bitcoin is a system designed to be everything the status quo isn’t. Decentralized, transparent, permissionless, with a well-defined and restricted monetary supply curve. Given the backdrop upon which it emerged, it’s unsurprising that as more time passes, the more popular it becomes. Humanity is desperate for a major reboot and an entirely different way of doing things. Bitcoin and other crypto assets offer exactly that opportunity in the realm of finance and money, thus capturing the imagination of millions of the most brilliant and passionate people across the world. Since the status quo stubbornly refused to reform and change the system after the financial crisis, humanity had no choice but to take charge and do it independently at the grassroots level. One thing that’s become increasingly clear to me as I’ve added years and experiences to my life, is that governments, generally speaking, hate freedom. It’s why something as beneficial and benign as cannabis remains illegal throughout the world, and why people like Jeff Sessions still want to criminalize it even in states where the actual people living there voted to make it legal (see Part 1 of this series). While the fairytale we’re conditioned to believe tells us government exists to protect us and create an environment in which humans can thrive, the reality is quite clearly the opposite. The crooked response to the financial crisis demonstrated this in spades to anyone paying even the slightest amount of attention. As we transition into 2018, increasing numbers of people will see government and large corporations as the unified threat they represent to the global economy and human freedom. Younger generations are particularly aware, as they’ve been thrust into a parasitic system designed to prey upon them via a lifetime of debt serfdom. The more people learn about the way the world really works, the more they’ll want to reject it and create something entirely different. This is where Bitcoin and crypto assets come into play. As Bitcoin rose through the $10,000 mark, I noticed an explosion in panic and fear on behalf of those who want to keep the current system in place. This is to be expected, as Bitcoin’s popularity is and should be seen as a report card on the global status quo. The financial system as it’s currently constructed is being publicly rejected with every uptick in the Bitcoin price, and with every billion dollars added to total crypto asset market capitalization. Naturally, this will make those in charge of the current predatory system, and those who have benefited most from it (oligarchs), increasingly hostile to its popularity. There are so many recent examples of such hostility it’d be impossible to highlight them all, but I’ll provide you with a few examples so you know what I mean. First, there was the clip of two billionaires discussing Bitcoin on Bloomberg. These weren’t the only two billionaires who chirped in about Bitcoin last week. Financial oligarch Ken Griffin came out with the truly original line of comparing Bitcoin to tulips, something I’ve heard non-stop in the more than five years I’ve been involved in the community. Via CNBC: Citadel’s Ken Griffin said Monday that bitcoin may be in a bubble. “Bitcoin right now has many of the elements of the tulip bulb mania we saw back hundreds of years ago in Holland,” said the billionaire hedge fund manager in an exclusive interview with CNBC’s Leslie Picker. Griffin, however, said he does believe the blockchain technology backing the cryptocurrency is valid. Griffin’s estimated net worth is $8.6 billion. Makes you wonder what sort of society and economy enriched someone like this to such an extent. Carl Ichan also chimed in. Via Coindesk: Billionaire investor Carl Icahn has jumped on the bandwagon of financial bigwigs saying bitcoin is in a bubble The business magnate and founder of Icahn Enterprises told CNBC that the cryptocurrency “seems like a bubble” and that he didn’t understand the hype around bitcoin. Icahn stated: “I got to tell you honestly, I don’t understand it … I just don’t get it. I just stay out of something if I don’t understand it.” He admits he doesn’t understand it, but calls it a bubble anyway. This is surprisingly common. Of course, there was the infamous nonsense spouted by Nobel Prize winning economist Joseph Stiglitz who appears viscerally triggered by Bitcoin, saying it has no social function and should be outlawed. Add to the above a plethora of central banker commentary about how dangerous Bitcoin is, and you know status quo types are beginning to sweat. Which brings me to the point of this piece. With Bitcoin having succeeded beyond the wildest imagination of status quo sycophants, many will begin to clamor and beg for an official response in order to defend their sleazy government sanctioned rackets. At this point, I could attempt to outline all the various ways the U.S. government and others could target free market crypto assets, but I’m not going to do that. The reason I’m not going to do this is because I think the cat’s already too far out of the bag for the power structure to stop this trend. The benefits to humanity generally, and younger generations specifically, will make any attempts to stop this freight train futile. Any government that tries to do so will simply shoot themselves in the foot. We stand on the precipice of historical shifts in relative economic power.Those regions that embrace crypto assets will thrive, those that reject them will die. — Michael Krieger (@LibertyBlitz) December 4, 2017 Unfortunately, most governments exist to protect and defend the status quo, versus doing what’s best for the public. If government actually cared about the future, every single country would be competing aggressively right now to be the most crypto asset friendly region on earth. The human brainpower and talent voluntarily dedicating their lives to this space is extraordinary. It’s a global movement and community the likes of which has rarely, if ever, emerged on this planet. The smartest people on earth are dedicating their lives to Bitcoin and other crypto assets. You want to bet against that? — Michael Krieger (@LibertyBlitz) December 1, 2017 That tweet above more or less summarizes how I see the situation. Anyone who bets against this overall space will ultimately end up historical roadkill. The emergence of Bitcoin and the crypto-asset ecosystem generally is one of the most liberating, paradigm disrupting events that’s ever manifested on this planet. Of course, entrenched interests won’t like it and will try to fight back, but they’ll be no more successful than those who wanted to ban the printing press. Bitcoin is achieving what global central banks completely failed at. Animal spirits, a dynamic economy and revolutionary innovation. — Michael Krieger (@LibertyBlitz) November 26, 2017 The above occurred despite governments having placed many roadblocks in the way. Imagine the innovation explosion that would be unleashed if governments decided to support this extraordinary community rather than fight it? At over $11,000 per bitcoin, a lot of money’s been made. While hodlers certainly prefer to spend fiat as opposed to bitcoin, the higher the price rises, the higher the percentage of their net worth is denominated in crypto. If the U.S. government actually cared about dynamic economic growth as opposed to merely protecting status quo interests, it would unleash the power of this crypto asset wealth creation machine by eliminating taxes on gains. If no capital gains were owed, it’d encourage people to spend some of this newly created wealth in the economy. It’s an obvious move, but because governments are mainly about control and power, their initial reaction likely will be to go in the opposite direction. The opportunities available right now for regions and nations willing to be openminded about Bitcoin and crypto assets generally are extraordinary. Government roadblocks and bans cannot and will not kill the spirit of this community and the ideals that motivate it. The only question is which regions/governments will put arrogance and control aside to do the right thing by their people. We’ll find out the answer to that question soon enough. As a declining global empire, the U.S. is unfortunately prone to doing particularly stupid things in order to protect the predatory system beloved by the oligarchs in charge. On the flip-side, there are plenty of wealthy Americans and others with influence who see Bitcoin for the incredible opportunity it is, and cooler heads may prevail. The truth is nobody knows exactly how all of this will turn out. In the short-term, we’re likely to face increased push back and we should be mentally prepared to face it. In the longer-term, the future appears exceptionally bright. * * * If you liked this article and enjoy my work, consider becoming a monthly Patron, or visit our Support Page to show your appreciation for independent content creators.
Сооснователь ведущей инвестиционной фирмы Satoshi Citadel Мигель Кунета, под управлением которой находятся крупнейшие брокерские компании на Филиппинах, а также приложения BuyBitcoin и Rebit, заявляет, что $10,000 был взят за счет хайпа в СМИ. В момент же снижения с $11,000 до $9,000 мейнстрим СМИ уже были готовы публиковать серии статей о следующем крахе биткоина. “У новостных изданий не было даже 24 часов, чтобы переварить тему на $10k, как биткоин был уже на $11.5k. На момент написания новостей об $11k, биткоин стоил уже 9k. Как только были написаны статьи о “Крахе биткоина”, криптовалюта уже вернулась к $11,000”, - пишет Кунета. По мере приближения биткоина к $12,000, он становится шестой наиболее используемой валютой в мире; прошло всего 8 лет с момента запуска в 2009 году. Тем не менее, хотя многие зафиксировали прибыль по биткоину, Кунэта считает, что криптовалюта вырастет до таких размеров, которые многие себе не могут и представить, и может дойти до разделения денег и государства. Биткоин может преодолеть $12,000 уже в декабре, так как на рынок должны выйти институциональные инвесторы, которые принесут с собой десятки миллиардов долларов капитала. Когда институциональные деньги начнут течь в сторону фьючерсов, рыночная капитализация биткоина перейдет к резкому росту, что обеспечит для рынка больше ликвидности. Такой стремительный рост привлечет еще больше инвесторов. “Более трети триллиона долларов. Такой суммарный объем торгуемых криптовалют в мире. $165 млрд. приходятся на биткоин, что указывает на возможности сети в плане доминирования. Технология биткоина и возможность создавать деньги каждому человеку на планете пошатнут власть королей, олигархов и правительств”, - заявил Кунэта. По вышеизложенным причинам некоторые инвесторы предполагают, что стоимость биткоина может достичь $45,000 к концу 2018 года. $11,874: Bitcoin Price Achieves New All-Time High, But It is Only the Beginning, CCN, Dec 04Источник: FxTeam
Looking to put bitcoin’s rise in context? How about this: Over the last five years, the world’s most valuable digital currency has risen an astonishing 11,000,000%. Furthermore, since Jan. 1, it has climbed 950%, compared with a total return of 18% for the S&P 500. Given the torrid pace of bitcoin’s climb, one would imagine that there are few traders left who possess the wherewithal to short the digital currency. And until recently, the options to short bitcoin were mostly offered through unregulated exchanges, and very risky given bitcoin’s volatility. But increasingly, mainstream exchanges have begun offering bitcoin-based derivatives that could make it easier for retail traders to short the digital currency. CME Group has said it will introduce a suite of bitcoin-linked products by the end of the year, and LedgerX, the first CFTC-approved Swap Execution Facility (or SEF), traded more than $1 million in bitcoin swaps and options during its first week. In Switzerland, one exchange has introduced options that make it easier for investors to profit if the bitcoin price drops. But other more creative ways to short the digital currency have existed for a while now – in some cases, for years. “All the options to short in common markets are becoming available in the bitcoin market,” said Charles Hayter, co-founder of market tracker CryptoCompare. “There’s pretty good liquidity for shorting bitcoin. The main difference with shorting the Nasdaq for example, is it will be a lot more volatile, so there’s a lot more risk. The rate to borrow will also be a bit higher." With bitcoin on the cusp of breaking above $10,000 for the first time, here’s a list of popular options for shorting bitcoin, per Bloomberg. Contracts for Difference "One of the most popular ways to short bitcoin is through CFDs, a derivative that mirrors the movements of the asset. It’s a contract between the client and the broker, where the buyer and seller of the CFD agree to settle any rise or drop in prices in cash on the contract date. 'CFD is currently a great market if you want to short bitcoin, especially ahead of that milestone 10K mark, which we think will bring some retracement,' said Naeem Aslam, a chief market analyst at TF Global Markets in London, which offers the contracts. 'The break could push the price well above $10,100 and it would be in that area when we could see some retracement.'" Margin Trading "Another common way to short bitcoin is through margin trading, which allows investors to borrow the cryptocurrency from a broker to make the trade. The trade goes both ways; a trader can also increase their long or short position through leverage. Depending on the funds kept as collateral to pay back the debt, this option increases the already risky bitcoin trade. Bitfinex, one of the biggest cryptocurrency exchanges, requires initial equity of 30 percent of the position. Short-margin trading positions on Bitfinex were at around 19,188 bitcoins on Monday, versus 23,931 long positions, according to bfxdata.com, which tracks data on the bourse." Borrow to Short Bitcoin "Most of the brokerages that allow margin trading will also let clients borrow bitcoin to short with no leverage. This will be a less risky way to bet bitcoin price will fall." Futures Contracts "The futures market isn’t as widely developed as CFDs and margin trading, but it’s still possible to make bearish bets on bitcoin with options. For now, LedgerX is the only regulated exchange and clearing agent for cryptocurrency options in the U.S. The CME Group Inc. and the Chicago Board Options Exchange have both asked for approval to list bitcoin futures, so that may open up the market to more investors." Shorting Bitcoin ETNs "Investors can also indirectly bet against bitcoin by shorting exchange traded notes with exposure to the cryptocurrency, like Stockholm-based Bitcoin Tracker One, and Grayscale Investments LLC’s Bitcoin Investment Trust. The risk is that these notes don’t always trade in line with bitcoin, so the exposure won’t be perfect." * * * Yesterday, Citadel’s Ken Griffin opined that he believes bitcoin is a bubble that will end in tears, joining a list of finance luminaries who have all expressed reservations about the digital currency’s epic rally. As a reminder: $0000 - $1000: 1789 days$1000- $2000: 1271 days$2000- $3000: 23 days$3000- $4000: 62 days$4000- $5000: 61 days$5000- $6000: 8 days$6000- $7000: 13 days$7000- $8000: 14 days$8000- $9000: 9 days$9000-$10000: ? The rise is even making some central bankers nervous. “The problem with bitcoin is that it could easily blow up and central banks could then be accused of not doing anything,” European Central Bank policymaker Ewald Nowotny told Reuters. But in his confirmation hearing earlier today, incoming Fed Chairman Jerome Powell said bitcoin is still too small to pose a real threat. "They don’t really matter today," Mr. Powell said. "They’re just not big enough."
(Bloomberg) -- Ажиотаж вокруг биткоина напоминает охватившую Голландию несколько веков назад тюльпаноманию, говорит Кен Гриффин, основатель хедж-фонда Citadel, управляющего активами на $27 миллиардов."Афера ли биткоин? Нет, - сказал Гриффин в понедельник в интервью CNBC. - Но участь таких пузырей, как правило, плачевна, и я опасаюсь насчет того,...
Итак, Венесуэле объявлен дефолт. Но мировые СМИ не очень активно освещают эту тему. Хотя, что может быть лучше для пропаганды «неэффективности» социалистической системы экономики и обличения "диктаторского" режима Мадуро? "Международная ассоциация свопов и деривативов (ISDA) постановила в четверг, что Венесуэла и нефтяная госкомпания PDVSA допустили дефолт по своим облигациям. Это спровоцирует выплаты по кредитным дефолтным свопам (CDS). У Венесуэлы был 30-дневный льготный период по выплате просроченных платежей по государственным облигациям и бондам PDVSA. Но в понедельник он истек, а платежи по некоторым облигациям так и не были сделаны. Поэтому все 15 членов специального комитета при ISDA проголосовали за то, чтобы признать это дефолтом страны и компании. В комитет входят представители таких финансовых организаций, как JPMorgan Chase, Goldman Sachs, Elliott Management, Citadel, AllianceBernstein. Чтобы определить, как будут сделаны платежи по CDS, комитет проведет новое заседание 20 ноября.
Forgotten home of Bradford Park Avenue, abandoned when club folded in 1974, hailed as ‘Angkor Wat of football’In his 40-year career as an archaeologist, Jason Wood has travelled the world, searching for Roman remains in Jordanian citadels and helping to restore royal palaces in Nepal. But his recent project was a little less exotic: digging up a patch of grass by some woods in Bradford.Ever since he was a small boy, Wood had been thinking about the site on Horton Park Avenue, across the road from the ornate Grand Mosque. He remembered his dad pointing out the overgrown grass where a football club had once stood, wondering for decades how a ground that could hold 37,000 fans could be left to the worms and the weeds. Continue reading...
Mueller’s Moves Signal Broad Scope (WSJ) Spain awaits next move by ousted Catalan leader from Belgium (Reuters) China, South Korea agree to mend ties after THAAD standoff (Reuters) For Manafort, Questionable Airbnb Sublets Became a Family Affair (BBG) U.S. business group worries Trump unprepared for commercial talks with China (Reuters) Google’s Dominance in Washington Faces a Reckoning (WSJ) Tech Giants Disclose Russian Activity on Eve of Congressional Appearance (WSJ) Collapse at North Korea nuclear test site 'leaves 200 dead' (Telegraph) Tech executives head to U.S. Congress under harsh spotlight (Reuters) Another China Company Defaults on Bond Payment as Borrowing Costs Jump (BBG) Google ditched autopilot driving feature after test user napped behind wheel (Reuters) Why Google and Amazon Aren’t in the Dow (BBG) Swiss prosecutors seek widening of secrecy law to bankers abroad (Reuters) Betting on the Next Fed Chair Often Goes Wrong (WSJ) Under Armour slashes 2017 forecast, revenue falls (Reuters) Is the ‘Death Tax’ Debate Finally Over? (BBG) Ex-Third Point Partner’s Bond Trades Focus of SEC Probe (BBG) Two Months After Harvey, Houston Continues to Count the Cost (WSJ) Goldman Agrees With Dalio’s Tale of Two Economies (BBG) Overnight Media Digest WSJ - For the second time in three years, Sprint Corp is preparing to leave T-Mobile US Inc at the altar after months of negotiations to bring together the two U.S. wireless providers. Directors at Sprint's parent company, SoftBank Group Corp, met in Tokyo last week and decided to suspend the merger efforts, according to people familiar with the matter. on.wsj.com/2yZRQip - Facebook Inc, Alphabet Inc's Google and Twitter Inc are set to divulge new details showing that the scope of Russian-backed manipulation on their platforms before and after the U.S. presidential election was far greater than previously disclosed, reaching an estimated 126 million people on Facebook alone, according to people familiar with the matter, prepared copies of their testimonies and a company statement. on.wsj.com/2yYwFNr - Netflix Inc plans to end the political drama "House of Cards" after the end of season 6, which is currently in production, a person familiar with the situation said. The decision was made before reports about alleged sexual misconduct by star Kevin Spacey, the person said. on.wsj.com/2yZ2rKr - ?Apple Inc, locked in an intensifying legal fight with Qualcomm Inc, is designing iPhones and iPads for next year that would jettison the chipmaker's components, according to people familiar with the matter. on.wsj.com/2z1UtQM - A federal judge on Monday blocked President Donald Trump from implementing a ban on transgender individuals from serving in the military, the latest high-profile White House initiative to run into problems in court. on.wsj.com/2yZBYMI - The Federal Bureau of Investigation is investigating a decision by Puerto Rico's power authority to award a $300 million contract to a tiny Montana energy firm to rebuild electrical infrastructure damaged in Hurricane Maria, according to people familiar with the matter. on.wsj.com/2yZROXC FT UK finance minister Philip Hammond will not break his fiscal rules to increase public spending in the autumn budget and fears investors, already worried by Brexit, will be spooked if he abandons the fiscal framework adopted only a year ago, the chancellor’s allies said. British petrochemicals company Ineos on Monday agreed to buy fashion brand Belstaff, best known for its waxed cotton motorcycle jackets, in the latest off-beat project by Ineos’s billionaire founder Jim Ratcliffe. Key details about reports outlining the economic impact of Britain leaving the EU on 58 industries will not be released by the Brexit ministry which said it needs to carry out policymaking in a “safe space”. NYT - Russian agents intending to sow discord among American citizens disseminated inflammatory posts that reached 126 million users on Facebook, published more than 131,000 messages on Twitter and uploaded over 1,000 videos to Google's YouTube service, according to copies of prepared remarks from the companies that were obtained by The New York Times. nyti.ms/2z56yXn - The day after Kevin Spacey apologized following an accusation that he made a sexual advance on a 14-year-old boy in the 1980s, Netflix Inc announced that the next season of his show "House of Cards" would be its last. nyti.ms/2z6qA3x - President Trump is expected to nominate Jerome Powell as the next chairman of the Federal Reserve, replacing Janet Yellen, whose term expires early next year, according to two people familiar with the plans. nyti.ms/2z5Ap1Q - The special counsel, Robert Mueller III, announced charges on Monday against three advisers to President Trump's campaign and laid out the most explicit evidence to date that his campaign was eager to coordinate with the Russian government to damage his rival, Hillary Clinton. nyti.ms/2z5UVzl - A federal judge on Monday temporarily blocked a White House policy barring military service by transgender troops, ruling that it was based on "disapproval of transgender people generally." nyti.ms/2z4Q29E Canada THE GLOBE AND MAIL Melbourne-based John Holland Group Pty Ltd has won tenders over the past year to participate in A$23 billion ($17.6 billion) worth of work on large public infrastructure projects, and expects to hire 100 people monthly over the next 15 months. tgam.ca/2xFxIRf Canada's brand-name pharmaceutical companies are pushing back against a plan to overhaul the country's drug-pricing regulator, saying they are keen to forge a compromise that would reduce prices, but not to a degree that could be "crippling" for the industry. tgam.ca/2xDl19b NATIONAL POST Cenovus Energy Inc picked former TransCanada Corp chief operating officer Alex Pourbaix to be its new president and chief executive officer, prioritizing expertise in dealing with external challenges over knowing the nuts and bolts of the business. bit.ly/2xDJOdA Beverage company Constellation Brands Inc is buying up to 20 percent of Canopy Growth Corp in a deal that lends legitimacy to Canada's fast-growing marijuana industry while potentially throwing open the door to additional investments in the sector by big international companies. bit.ly/2z0dEN9 Britain The Times - Stuart Gulliver, outgoing chief executive of HSBC Holdings Plc, and Lloyd Blankfein, chief executive of Goldman Sachs Group Inc, on Monday called for clarity over Britain's future relationship with the European Union, warning that jobs and investment depend on a prompt decision. bit.ly/2z0IbIe - Chancellor Philip Hammond said Monday that Steffan Ball, chief economist at Citadel, a $26 billion hedge fund based in Chicago, was his new economic adviser. bit.ly/2z0dliZ - Pearson Plc is understood to be nearing a sale of its English-language teaching business to Asian private equity funds Baring Private Equity Asia and Citic Capital Holdings for up to $400 million. bit.ly/2z1hFPa The Guardian - Nationwide Building Society has paved the way for an across-the-board increase in mortgage costs by announcing that a 0.25 pct interest rate rise would be passed on in full to its 600,000-plus variable-rate home loan customers. bit.ly/2yZtuVO - Hundreds of free-to-use cash machines are at risk of being closed down on high streets across the UK as a result of proposals being published this week to overhaul the 70,000-strong Link network. bit.ly/2z0nXOV The Telegraph - Chemicals giant Ineos has bought Belstaff, the British heritage fashion brand, in the latest off-centre move by its founder and chairman, billionaire Jim Ratcliffe, a month after he unveiled plans to start making cars. bit.ly/2z0ltA5 - Ten Lifestyle, the London-based concierge service is eyeing a listing on the junior Aim market in a bid to raise 40 million pounds and help it continue its domestic growth as well as increase its overseas footprint. bit.ly/2yZdmDO Sky News - Willie Walsh, the chief executive of British Airways' parent company IAG, has dismissed claims - including from Chancellor Philip Hammond - that flights could be grounded if Britain leaves the EU without a divorce deal. bit.ly/2z1MyD7 - A pack of hedge funds is closing in on a takeover of BrightHouse, Britain's biggest rent-to-own retailer, just days after it was slapped with a 15 million pound ($19.81 million)compensation bill by the City watchdog. bit.ly/2z1MyD7 The Independent - Walmart's British supermarket arm Asda announced that Chief Executive Sean Clarke will be stepping down at the end of the year, to be replaced by the company's current deputy Chief Executive and Chief Operating Officer Roger Burnley. ind.pn/2yZblY
YEAH, I’VE NOTICED THE HYPERMASCULINITY IN VIDEOGAME FANS: Grad student: Gaming culture privileges …
YEAH, I’VE NOTICED THE HYPERMASCULINITY IN VIDEOGAME FANS: Grad student: Gaming culture privileges ‘hypermasculine’ men. But he sounds kind of bigoted: “Jeremy Omori contends that the larger gamer community is littered with hypermasculine, heterosexual, cis male, and often white privilege, noting that a large gay-gaming group in Arizona is ‘very white.'” Well, “littered with” sounds […]
Анкара намерена полностью блокировать кантон Африн на севере провинции Алеппо, заявляют курды.
Yes, it's another glaring case of "revolving door" cronyism between Wall Street and the SEC: on Wednesday, the Securities and Exchange Commission announced it had hired Brett Redfearn, a JPMorgan banker, to head the agency's Division of Trading and Markets, arguably the most important group within the SEC, one which oversees U.S. stock markets and brokerages. Redfearn, who is currently head of market structure at JPM, would fill a slot that has been vacant since January when the previous head of Trading & Markets, Stephen Luparello left the SEC... and three months later joined Citadel as General Counsel, which as a reminder is one of the biggest HFT operators and retail orderflow frontrunners in the world, is responsible for one-fifth of all trading on the $26 trillion US stock market and lists Ben Bernanke as its advisor. The regulator's Division of Trading and Markets group plays a key role in dealing with some of the most pressing matters facing the agency, including overseeing the construction of a massive trade database being built to help U.S. regulators police the stock market and keep tabs on high frequency traders, as well as writing rules for exchanges and dark pools. To simplify: a JPMorgan guy is coming in to fill the most important regulatory position at the SEC, one that looks at market structure - and fairness - and which until recently was filled by a guy who now works at Citadel as its new general counsel. A revolving door, if there ever was one... To be sure, that this is another glaring example of regulatory capture, is painfully obvious. Only this time there may be a twist. While SEC Chairman Jay Clayton has signaled a willingness to change market-structure rules that some critics argue are antiquated, he’s provided few details on his approach. Clayton, a former deals lawyer whose career wasn’t focused on market-structure issues, has prioritized bolstering initial public offerings according to Bloomberg. As a result, Redfearn - the former head of market structure at America's biggest bank - will likely have significant sway at the agency because of his expertise. As Bloomberg reports, Redfearn has been at JPMorgan for more than nine years. Earlier this year he expanded his role, moving from running equity market structure strategy to overseeing global market structure for all asset classes. Where it gets interesting, is that in the past, Redfearn has advocated for a regulatory overhaul of markets, and in April, he said Regulation NMS - a landmark SEC rule approved in 2005 that accelerated a shift to electronic trading in the U.S. stock market, and which allowed the uncontrolled, explosive proliferation of HFT algos - is “overdue for reform.” This, as Bloomberg writes, may set up a clash with not only stock exchanges, who are among the most influential - and "generous" - voices in Washington around financial regulation, but also the just as powerful HFT lobby. Also notable - Redfearn has emerged as a critic of the increasingly costly fees that U.S. stock exchanges charge traders who want access to vital data on prices. Of course, those fees only make sense in a world in which some traders, those with millions to burn, with to receive trade data ahead of everyone else, whether by laser, microwave or fiber optic. Which would suggest that Redfearn's criticism is ultimately aimed at not only the current multi-tiered nature of the market, but at high frequency traders as well. “We have a fundamental tension in our system of self-regulation that needs to be addressed,” Redfearn said in April. The tension, he argued, comes from the fact that stock exchanges, once public utilities, have over time become publicly traded companies themselves. Which, ironically, is absolutely correct, and if the now former-JPM executive wishes to indeed engage with the practices he finds as unfair, that could well mean the end of the HFT dominance in capital markets. As for what JPM gets out of it, well that remains to be seen...
Having taken a four month hiatus from blogging, Citadel advisor and former Fed chair Ben Bernanke penned another article on his Brookings blog in which he discusses a familiar subject: that the Fed has run out of tools, a problematic reality which would be exposed by the next financial crisis, so in advance, Bernanke proposes an even more unorthodox monetary policy: price-level targeting. Pointing out the obvious, namely that as a result of the bursting of the last Fed-created bubble, the US economy remains mired in "low nominal interest rates, low inflation, and slow economic growth" which "pose challenges to central bankers", central banks may want to consider temporary price-level targeting, or PLT, as Bernanke is "no longer confident" that the Fed’s “current monetary toolbox would prove sufficient to address a sharp downturn." The problem, as the ex-Chairman explains, is that with estimates of long-run equilibrium level of real interest rate “quite low,” Bernanke writes that the next recession may occur when the Fed has “little room to cut short-term rates”; as "problems associated with the zero-lower bound (ZLB) on interest rates could be severe and enduring." What Bernanke concedes here, is that the current pace of rate hikes and balance sheet unwind are not nearly rapid enough to provide the monetary policy buffer that will be needed to address the next economic crisis, and as a result the Fed needs to resort to more aggressive "temporary" measures to boost inflation, bypassing the Fed's implicit 2% inflation target, and heating up the economy substantially. To short-circuit the effects of the zero-lower bound, and to "temporarily" (that word is critical to Benanke, who uses it no less than 24 times in his article) overheat the economy so the Fed can boost its recession-fighting ammunition, Bernanke "proposes an option for an alternative monetary framework" that he calls "a temporary price-level target—temporary, because it would apply only at times when short-term interest rates are at or very near zero." As noted, Bernanke says "temporary" over 20 times, which is ironic because after the Fed injected over $4 trillion in liquidity in the financial system, and 8 years later the Fed is not only still unable to hit its stated 2% inflation target on a consistent basis, but openly admits inflation is a "mystery", a better word would be "permanent." How does price-level targeting differ from conventional inflation-targeting? As Bernanke explains, the "the principal difference is the treatment of “bygones.” An inflation-targeter can “look through” a temporary change in the inflation rate so long as inflation returns to target after a time. By ignoring past misses of the target, an inflation targeter lets “bygones be bygones.” A price-level targeter, by contrast, commits to reversing temporary deviations of inflation from target, by following a temporary surge in inflation with a period of inflation below target; and an episode of low inflation with a period of inflation above target. Both inflation targeters and price-level targeters can be “flexible,” in that they can take output and employment considerations into account in determining the speed at which they return to the inflation or price-level target." That is a long-winded way of saying that price-level targeting is an even more brute force approach to pushing inflation higher, one which ignores transitory bursts in inflation, which in a world of record debt has the potential to unleash a financial disaster as its sends the price of global (record) debt tumbling, creating a risk waterfall across financial markets, and reverberate in the economy. In other words, the Fed would flood the system with so much liquidity that economic inflation spikes and only afterwards is reduced back to some baseline level. What happens in between, to Bernanke, is of secondary importance, although with many Wall Street strategists conceding that a burst of inflation is the critical catalyst to unleash a sharp market drop, one could also say that Bernanke is advocating a market crash, wiping away trillions in "welath effect" for the top 1%. Bernanke ignores such potential downsides, and instead focuses on the positive, saying that price-level targeting has two advantages over raising the inflation target: "The first is that price-level targeting is consistent with low average inflation (say, 2 percent) over time and thus with the price stability mandate. The second advantage is that price-level targeting has the desirable “lower for longer” or “make-up” feature of the theoretically optimal monetary policy." That said, the author concedes that PLT has drawbacks: For one, it would amount to a significant change in the Fed’s policy framework and reaction function, and it is hard to judge how difficult it would be to get the public and markets to understand the new approach. In particular, switching from the inflation concept to the price-level concept might require considerable education and explanation by policymakers. Another drawback is that the “bygones are not bygones” aspect of this approach is a two-edged sword. Under price-level targeting, the central bank cannot “look through” supply shocks that temporarily drive up inflation, but must commit to tightening to reverse the effects of the shock on the price level. Bernanke's punchline at least contains some truth, namely that PLT would be a "painful" process to all those who rely on nominal incomes to purchase goods and services, especially if said process ends up running away from the Fed's control and results in hyperinflation, to wit: "Given that such a process could be painful and have adverse effects on employment and output, the Fed’s commitment to this policy might not be fully credible." And in case his PLT idea is frowned upon - perhaps politicians don't want a revolution - Bernanke proposes another, just as "painful" idea, namely using inflation targeting "but to raise the target to, say, 3 or 4 percent. If credible, this change should lead to a corresponding increase in the average level of nominal interest rates, which in turn would give the Fed more space to cut rates in a downturn. This approach has the advantage of being straightforward, relatively easy to communicate and explain; and it would allow the Fed to stay within its established, inflation-targeting framework." Quite easy to explain indeed, and here's one attempt "we will inject so much liquidity, not only will we blow the biggest asset bubble ever, but it will make your head spin how fast prices soar." But it's ok, it will be "temporary." Finally, while there is much more in Bernanke's proposal which was inspired by the "insightful theoretical work of Paul Krugman, Michael Woodford and Gauti Eggertsson", even Bernanke admits there will be problems, or rather one major one: the peasantry - for some "unknown" reason - is not a fan of runaway inflation: One obvious problem is that a permanent increase in inflation would be highly unpopular with the public. The unpopularity of inflation may be due to reasons that economists find unpersuasive, such as the tendency of people to focus on inflation’s effects on the prices of things they buy but not on the things they sell, including their own labor. But there are also real (if hard to quantify) problems associated with higher inflation, such as the greater difficulty of long-term economic planning or of interpreting price signals in markets. In any case, it’s not a coincidence that the promotion of price stability is a key part of the mandate of the Fed and most other central banks. A higher inflation target would therefore invite a political backlash, perhaps even a legal challenge. Ah yes, nothing quite like a former Fed reserve chairman confused by why surging inflation is "highly unpopular with the public", which is unable to grasp that only through soaring prices of goods and services will wages rise... well, maybe: because as the whole broken Phillips Curve fiaso has shown 8 years into this recovery with 4.2% unemployment and virtually no real wage growth, perhaps the reason why the "public" is not too crazy about 4% inflation is that while prices surge, wages seems to have flatlined. In short, Bernanke is alleging that inflation is unpopular because we, simple peasants, only focus on rising prices while ignoring wage growth. To which the only possible retort is that the "public" would be more than happy to focus on higher wages... if these were permitted for anyone but the top 1%. Full Bernanke article here
Jim Grant, author of Grant's Interest Rate Observer, first hinted last week that not all is well when it comes to the world's biggest hedge fund, Ray Dalio's $160 billion Bridgewater (of which one half is the world's biggest risk-parity juggernaut). Speaking to Bloomberg last week, Grant said he was "bearish" on Bridgewater because founder Dalio has become "less focused on investing, while the firm lacks transparency and has produced lackluster returns." Grant slammed Dalio's transition from investor to marketer, and in a five-page critique of the world’s largest hedge fund, said Dalio has been preoccupied with his new book, sitting for media interviews and sending Tweets. “Such activities have one thing in common: They are not investing,” Grant writes in the Oct. 6 issue of his newsletter. “Yet here he is, laying it all out to the world again, Tweeting, promoting his book, attacking the press -- necessarily doing less of his day job than he would otherwise do.” Grant continued his scathing critique, accusing Bridgewater of "lately performed no better than the typical hedge fund.” Grant is right: since the start of 2012, Bridgewater’s Pure Alpha II Fund has posted an annualized return of 2.5% vs its historic average of 12%, and is down 2.8% this year through July. The underperformance may be explainable: after all the polymath billionaire has been busy opining in recent months on subjects from the rise of populism to his affinity for China, "which are distraction from making money" Grant said. But if Grant had limited himself to merely Dalio's stylistic drift, it would be one thing: to be sure, the fund's billionaire founder may simply have lost a desire to manage money and has instead discovered a flair for writing books and being in the public spotlight. However, Grant - or rather his colleague Evan Lorenz - went deeper, and as he writes in the latest Grants letter, he raises several troubling points, which go not to the hedge fund's recent underprofmrance - which can be perfectly innocuous - but implicitly accuse the world's biggest hedge fund of borderline illegal activities and, gasp, fraud. Some of the more troubling points brought up by Lorenz are the following: Bridgewater has directly lent money to its auditor, KPMG, to which KPMH's response is that “these lending relationships . . . do not and will not impair KMPG’s ability to exercise objective and impartial judgment in connection with financial statement audits of the Bridgewater Funds.” Bridgewater has 91 ex-employees working at its custodian bank, Bank of New York. Only two of Bridgewater's 33 funds have a relationship with Prime Brokers. In these two funds, Bridgewater Equity Fund, LLC and Bridgewater Event Risk Fund I, Ltd., 99% of the investors are Bridgewater employees. Opaque ownership concerns: "Two entities—Bridgewater Associates Intermediate Holdings, L.P. and Bridgewater Associates Holdings, Inc.—are each noted as holding 75% or more of Bridgewater." Why the massive, and expensive, ETF holdings: "The June 30 13-F report shows U.S. equity holdings of $10.9 billion. The top-16 holdings, worth $9.5 billion, or 87% of the reported total, come wrapped in ETFs, including the Vanguard FTSE Emerging Markets ETF, the SPDR S&P500 ETF Trust and the iShares MSCI Emerging Markets ETF. Beyond the fact that Bridgewater reports holding few U.S. equities, you wonder why such a sophisticated shop would stoop to such a retail stratagem. Surely the Bridgewater brain trust could replicate the ETFs at a fraction of the cost that the Street charges." And perhaps most troubling, is the SEC in cahoots with Bridgewater? "Lorenz asked the SEC how Bridgewater’s answers comply with the requirement to “[p]rovide your fee schedule.” Via email, the agency replied, “Decline comment, thanks.” And so on. There is much more in the full Grant's note, which readers can read by subscribing at Grant's website, but here are some of the key questions posed: That phenomenal track record: Dalio has done his best work in the shadows. In a 1982 Wall Street Week interview, he predicted not the great bull market but a new calamity (the erroneous call nearly bankrupted Bridgewater). In a 1992 Barron’s article, he wrote that the country was in a depression and that it would be hard-pressed to escape from it. From 1996 through Aug. 30, 2017 the Wasatch-Hoisington U.S. Treasury Fund has returned a compound 7.9% net of fees. Over the same span, according to a Sept. 8 article in The New York Times, All Weather returned an identical 7.9% net of fees. Dalio's sudden infatuation with the public spotlight... Principles is the first of a projected two-volume work on the theory and practice of radical transparency and abrasive truth-telling. The second installment will provoke more controversy and another time-out from the author’s day job. There will be reviews to stew over, angry emails to compose, interviews to be conducted. Since Dalio took to Twitter on April 24, he has tweeted 97 times. He has written 24 blog entries, amounting to a grand total of 22,112 words, on LinkedIn (Harrison Waddill of this staff has counted them). Beyond the April TED talk, Dalio is on the interview circuit. He has addressed reporters at Business Insider, Bloomberg, CIO Magazine, The New York Times and ValueWalk, among others. In January he attended the annual World Economic Forum in Davos, Switzerland. In that pleasant alpine setting, the billionaire worried about the rise of populism. ... even as Bridgewater is covered in secrecy: The New York Times, recently at work on a story about Bridgewater, submitted a request under the Public Information Act of Texas for details that Bridgewater would rather not have disclosed. The CFO of Bridgewater, Nella Domenici, registered the firm’s objections in a June 5 affidavit: “These documents contain information that constitutes private, valuable and commercially sensitive trade secrets that, if disclosed, would substantially harm Bridgewater’s ability to compete in the marketplace.” And what data, exactly, did Domenici worry about divulging? The list includes “fee structure,” “litigation exposure,” “related party information” and “debt structure, including sensitive, non-public information pertaining to our existing financing,” among other items. Why the world’s largest and most successful hedge fund, headed by the world’s 54th richest person, has a “debt structure” at all is a good question. The watchful Paul J. Isaac, CEO and founder of Arbiter Partners Capital Management, read the affidavit and emailed his reactions: “Remarkable and a bit inexplicable. Bridgewater presumably raises a great deal of money from public bodies. There is an implicit assumption here that ‘sunlight’ rules that apply to a host of public relationships should not apply to Bridgewater.” On its bizarre investment style: There are further enigmas. The June 30 13-F report shows U.S. equity holdings of $10.9 billion. The top-16 holdings, worth $9.5 billion, or 87% of the reported total, come wrapped in ETFs, including the Vanguard FTSE Emerging Markets ETF, the SPDR S&P500 ETF Trust and the iShares MSCI Emerging Markets ETF. Beyond the fact that Bridgewater reports holding few U.S. equities, you wonder why such a sophisticated shop would stoop to such a retail stratagem. Surely the Bridgewater brain trust could replicate the ETFs at a fraction of the cost that the Street charges. The potential conflict of interest involving Bridgewater's auditor: The “related party information” schedule of the Bridgewater ADV form records the fact that Bridgewater lends money to its auditor, KMPG, LLC. Or, more precisely, Bridgewater owners with a greater- than-10% ownership stake in the Dalio firm are creditors to KMPG. Long legal sentences parse this curious relationship, for it would seem to fly in the face of the SEC’s Rule 2-01(c) (1)(ii)(A) of Regulation S-X, known as the Loan Rule. This rule prohibits an auditor from borrowing from an auditing client. Or that’s what it appears to say. Investigation and ponderation lead Bridgewater and KMPG to conclude that the Loan Rule does not apply to them in this instance. (Fidelity Management & Research Co. got itself a non-action letter from the SEC for a very similar harmless and inconsequential lender-creditor relationship, the document explains.) Leaving no stone unturned, KMPG likewise consulted its conscience. The verdict here, too, was favorable, because “these lending relationships . . . do not and will not impair KMPG’s ability to exercise objective and impartial judgment in connection with financial statement audits of the Bridgewater Funds.” It’s as if Dalio & Co. had never lent the auditor a dime (just how much money was lent and at what rate of interest go unmentioned). The potential conflict of interest involving Bridgewater's custodian: “After reading that footnote,” Lorenz observes, “an investor may take a measure of solace from the fact that the custodian of many Bridgewater funds is Bank of New York Mellon Corp., the world’s largest custodian bank. An investor may take less comfort from the fact that many of the BoNY employees working on the Bridgewater account are, in fact, former Bridgewater employees. In December 2011, Bridgewater signed a deal with Alexander Hamilton’s old bank: Bridgewater fired 91 back-office employees; BoNY hired these 91 practitioners of radical transparency to work Bridgewater’s books in an outsourcing contract.” The complete lack of (non-fonclicted) prime brokers: “As you scroll through the 206 pages of part one to Bridgewater’s filing, you might notice other oddities,” Lorenz goes on. “Only two of the 33 funds have relationships with prime brokers: Bridgewater Equity Fund, LLC and Bridgewater Event Risk Fund I, Ltd., in which 99% of the investors are Bridgewater employees.” Prime brokers perform a variety of helpful hedge-fund services. They act as a central clearing house through which to settle trades (useful for reducing collateral requirements by netting positions). They lend securities to allow a client to sell short. They furnish margin debt. The brokers earn various fees, including those generated by rehypothecating margined portfolios. Longonly funds or unleveraged funds have little need for such accommodation, but Bridgewater’s funds hardly match those descriptors. Pure Alpha strategies go long and short and All Weather famously leverages its bond portfolios. The potential conflict of interest involving the company's fee structure and the SEC: Registered investment advisors are under the annual obligation to file Form ADV with the U.S. Securities and Exchange Commission. On this document are recorded management fees, among other facts and figures. The SEC’s instructions for the fee section of the report are plain and simple: “Describe how you are compensated for your advisory services. Provide your fee schedule. Disclose whether the fees are negotiable.” Renaissance Technologies, LLC, no more welcoming to prying eyes than Bridgewater, complies with that directive. So does risk-parity competitor AQR Capital Management. They note the performance and management fees (or range of fees) charged for each strategy managed as a percentage of net profits and assets under management. Dalio & Co. opts for a qualitative approach, as if the SEC were suggesting a course of action rather than, say, requiring it: “Bridgewater offers fee arrangements which vary by strategy and may involve management fees (generally a percentage of assets), performance fees (generally a percentage of profits) or some combination of the two. For new client relationships, Bridgewater’s standard minimum fee is expected to be $500,000 for its All Weather strategy, $4,000,000 for its Pure Alpha and Pure Alpha Major Markets strategies, and $2,700,000 for Optimal Portfolio.” No percentage of assets or profits is vouchsafed. Lorenz asked the SEC how Bridgewater’s answers comply with the requirement to “[p]rovide your fee schedule.” Via email, the agency replied, “Decline comment, thanks.” The odd complaints against the company's home-grown technology: To credit the thrust of numerous comments from employees on the review website GlassDoor.com, Dalio would be better advised to worry about the fall of technology—his own. There’s a wide range of opinions on Bridgewater, of course. Some bristle under the unique culture. Others love it. One constant complaint is the poor quality of the company’s IT. Thus, from a March 19, 2017 posting: “If you are an engineer or technologist, working here will be negative value added to your learning process. Like taking a step into a parallel dimension where open source never existed and Excel and badly designed home grown software are the solution to all problems.” Which brings us to Grant's ominous conclusion: "Many are the mysteries and contradictions of the world’s largest hedge fund. We will go out on a limb: Bridgewater is not for the ages." To which one can counter: will Bridgewater be one for the Harry Markopoloses, and if so, when will Dalio's own day of reckoning come? There is much, much more in the full note, to read it please go to Grant's website.
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