Monday, September 16, 2019

What Do Alan Greenspan, Warren Buffett And Jim Cramer Think About Negative Rates?

Everyone's talking about negative rates, but it's hard to find two people that are willing to say the same thing. In light of this, I thought it might be prudent to see what Alan Greenspan, Warren Buffett and Jim Cramer have to say about negative rates. As on overview,
  • Alan Greenspan thinks negative rates are a sign of an aging population.
  • Warren Buffett thinks that if interest rates are nothing, values can be almost infinite.
  • Jim Cramer thinks negative rates are a sign that we're not in a robust economy (talk about stating the obvious).

Let's start with Alan Greenspan.



Greenspan thinks negative rates are a sign of an aging population.


What's his logic? You can't have negative rates unless you have buyers. Greenspan thinks the buyers represent an aging population that's willing to pay money to secure their cash for the next 20-30 years.

After an awkward start, the host asks Greenspan:
What about the notion of the economy weakening?
Greenspan's response,
It's going to depend in large part on the stock market. We underestimate the wealth effect on the economy...
But then adds,
Overall the economy seems to be sagging.
These feel like conflicting statements, but I digress.

Later, when asked about what negative rates signify, Greenspan had this to say:
What it signifies is that the world population is aging. People are recognizing that they are dying off at a much later date than when they contemplated when they started to save.
He goes on to make a quick comment on gold (XAU):
One of the reasons gold prices are rising so much... that's telling us that people are looking for resources, which they know are going to have a value 20 or 30 years from now as they age. And they want to make sure they have the resources to keep themselves in place. That is clearly the fundamental force that's driving this, but we don't know how far it will go.
This makes sense from an economics perspective, but it assumes negative rates are a common market phenomenon. They aren't.

Warren Buffett disagrees with Greenspan as well.

In an interview on CNBC, Buffett had the following to say about negative rates:
What's happened with interest rates is really extraordinary. You could go back and read everything that Keynes wrote, everything that Adam Smith or Ricardo or Paul Samuelson -- you won't see a word about sustained negative interest rates. I mean we are doing something the world has never seen. It does have the effect of making assets more valuable. Interest rates are like gravity in valuations. If interest rates are nothing, values can be almost infinite.
He goes on to explain what impact negative rates are already having on his company:
So Berkshire Hathaway (#BRK.A) is sitting with billions of dollars of euros in an insurance company in Europe and they will bear a negative rate. We would be better off putting them in a big mattress that we could stick it in -- if I could just find someone that I trust to sleep on the mattress.
If we have a billion euros at minus 35 basis points, it would be $3.5 million euros a year that it's costing us just to have that....It [negative rates] distorts everything...we do not know how this movie plays out.
$3.5 million euro for sitting on a mattress? You can trust me, Buffett. If you're reading this, I've got your back.

He follows up with some Buffett wisdom, spoken like the king of insurance that he is:
In economics the most important thing to remember is that you always want to ask yourself "and then what". After anything that happens, if someone tells you that "this" thing is going to happen, there's always the need to ask "and then what". And then what? In terms of sustained low interest rates the answer is, I don't know.

Jim Cramer does. He thinks thinks negative rates are a sign that we're not in a robust economy.


In response to Trump's negative rate tweets, Cramer had this to say:
I want them to cut rates, but negative rates though, we don't want negative rates. That's just a sign that we're not a robust economy.
To which the host responded:
Is bonehead appropriate for a Fed chief that he appointed?
Cramer:
He appointed him, that was his appointee.
Host:
Yes, it was, well as we all know he tires of people quickly.
Cramer:
Yes.
Host:
In this case though, he can't fire them. Because one would think, given the frequency of Tweets, if he could, it would have happened a long time ago.
Cramer:
David, I think you got a keen eye for the obvious there partner.
Host:
Thank you. Yeah, a keen sense for the obvious is what I've made a career out of.
Cramer:
Yeah, you really have.
Gotta love that Cramer. Let's skip forward a bit to see what he really thinks about negative rates:
Host:
And now you have JPMorgan's Diamond saying they're preparing for zero interest rates. Lowering their guidance on interest income.
Cramer:
Yeah, but I was looking on Twitter and someone also posted that they're looking at 5% yesterday, and it was the best Tweet of the day because it just shows that they're prepared for anything or you could say that they don't know what they're doing.

Takeaways

The truth is, negative rates have been around for a while. Denmark’s policy rates fell below zero in July 2012, followed by the European Central Bank, the Swedish Riksbank, and the Swiss National Bank. Japan set its leading policy rate below zero on January 29, 2016. Now there's over $20 trillion in negative yielding debt in the world (both central banks and corporate). Put another way, banks and corporations around the world are already making money on $20 trillion in debt/cash they issued. It's really a brilliant scheme when you think about it.

What do I think? I think this makes me want to avoid Treasuries and buy bitcoin (BTC), gold and real estate.

That said, negative interest rate policy (NIRP) is a last-ditch attempt to generate spending investment. When combined with more QE, it makes asset prices go through the roof, as Buffett said. At some point, central banks will run out of assets to buy, but if rates do go negative, the market is about to have one last run and that run is going to be explosive.

I think that's the essence of this. If there is ANY one major takeaway from these three views on negative rates, it's that you need to be prepared for anything because what started out as a short-term emergency experiment has become the new norm. And now that new norm has created the need for more short-term emergency experiments because what used to work has stopped. As Buffett would say, we have run out of "and then whats".

Tuesday, September 10, 2019

Herd Behavior In Financial Markets: A Study On Contagion Theory


 "Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly and one by one." Charles Mackay (1841)
This is the opening quote in the paper Herd Behavior in Financial Markets by Sushil Bikhchandani and Sunil Sharma published as an International Monetary Fund staff paper in 2001. Marco Cipriani and Antonio Guarino decided to take another look at this paper, published by the Federal Reserve Bank of New York, to see if its conclusions could help to better understand the market in 2015. Likewise, I want to use it to see if it can help to gain a better perspective on the level of volatility in the market today.

Herd Behavior Defined

First, let's define herding. Herding is when a trader disregards their own knowledge or trading plan to follow the behavior of the crowd. The reasons for the Fed's interest in the subject is clear -- to understand how to get ahead of, or put tools in place to counteract, contagion, specifically information contagion as discussed in the article Federal Reserve Bank Of New York: A Study On Contagion Theory.

The authors split the identification of "herding" from the use of data into two categories: spurious and real. Some herding, characterized by clustering in statistical data, may be the result of a public announcement rather than true herd behavior. In response to this the authors present another way to measure herd behavior through a theoretical model.

The Theoretical Herding Model

The model used to test the theory is based on an asset that is traded over a period of time. An event occurs at the beginning of each day the asset is traded. Some traders receive or find public or private information about the asset -- these are considered "informed" investors. All other traders are therefore considered to be uninformed and are therefore considered to be trading due to liquidity or re-balancing. If no event occurs, all traders are uninformed.

So how does this scenario generally play out. In a nutshell, the herd convinces the trader to put its theory over the traders own knowledge about the stock. Here's the thought process:
  1. The informed investor knows something happened to change the fundamental price of the asset.
  2. The investor realizes that their position is the opposite of what's occurring in the market.
  3. The informed investor weighs the importance of their own private information or trading plan against the asset's movement in the market.
  4. If the market movement is deep enough the trader will go against her own plan in favor of the market. The rationale being that the information traders are trading on in the market must be better than what she knows.
In this way, herd trading is a made into a rational decision, at least in our minds.

Example: Ashland's Herd Traders

The authors use Ashland Inc. (NYSE: ASH) in 1995 to further illustrate the theory.
We find that herding on Ashland Inc. occurred quite often: on average, the proportion of herd buyers was 2 percent and that of herd sellers was 4 percent. Additionally, we find that not only did herding occur but also it was at times misdirected (that is, herd buying in a day when the asset's fundamental value declined and herd selling in a day when the asset's fundamental value increased).
The authors go on to find that "the price was 4 percent further away from its fundamental value than it would otherwise have been." This seems like a rather small percentage, but the data supports these findings and according to the VIX, contrary to perception, the market is no more volatile in 2015 than it was in 1995. Based on the chart below, it appears the same can be said for 2019. 



So What

What are the implications of this for the Fed and for the individual investor? The implication is that what we think is volatility due to fundamental changes in the market's value may actually be due to the herd behavior of traders with greater levels of capital to spend. They'll have even more to spend if rates go negative.

That said, it's hard to make definitive conclusions about the application of this data until we have a way to measure a stock's "herd" appeal.
  • Perhaps companies with a higher degree of volume or volatility also have a higher percentage of herd traders. 
  • Perhaps this is the reason stock runs are often followed by corrections. 
  • Perhaps stocks with a high P/E have a higher degree of herd buyers? 
A "Herd Index", theoretically, would be able to provide buy and sell signals that were even more reliable than P/E multiples in finding over- or under-priced stocks. As of this writing I am unaware of any such measure. That said, JPMorgan recently created the “Volfefe Index” to measure the impact of President Trump's tweets on the market so anything is possible. 

Monday, September 9, 2019

Should You Diversify Your Portfolio With Bitcoin?


To buy bitcoin or not to buy bitcoin...that is the question.

It can be a hard question to answer and rightly so. 

The good news is that you don't have to draw a line in the sand. This is not a do or die situation (unless you make it one). You have the liberty to invest your wealth wherever you want. And, if there's anything I've learned in all my years of studying financial markets, it is that diversity is the key to riding out economic cycles. Your portfolio gains strength from diversifying your assets, especially if those assets aren't correlated with one another. 

I know the media is politicizing the recession, but this has nothing to do with Trump. This is about a global 'bow' that is about to break. All signs are pointing south, from negative interest rates to declining GDP levels. There may be those that have a vested interest in telling you otherwise, but if we use the same barometers of economic health that we've used over the past 60 years, we are due for a recession.  

For example, Fed Chairman Powell was heard across financial media last week saying that he did not think a recession was looming. Meanwhile, his own NY Fed just published the chart below suggesting otherwise. The blue represents periods of recession.

And, if a recession isn't a concern, why are you lowering rates? 

What do I think is going on?

Personally, I think central banks figured out they could make more money from negative rates than by raising the IOER. They're going for the big whale con.

It's hard to know what's going to happen for sure, but one thing is certain, a downturn is coming. The best way to guard against the inevitable downturn is to diversify your asset base. In simpler terms, you never want to put all your eggs in one basket. You certainly don't want to ban the fastest growing asset class in the world from your portfolio. 

Jeff Sprecher (pronounced “Sprecker”), the founder, chairman, and CEO of Intercontinental Exchange (ICE) is also a believer in bitcoin. And, I don't mean that in a general sense. Sprecher is a true believer; an evangelist of sorts. 

Sprecher's name may sound familiar because ICE is also the world’s second largest financial exchange by revenue. ICE also owns NYSE American, the leading platform for mid-cap companies. 

In the bitcoin community, however, Sprecher is known more so for his work as founder of Bakkt, one of the most talked about bitcoin ventures happening this year. ICE is partnering with Microsoft, Boston Consulting Group, and Starbucks to make bitcoin accessible to the world’s largest financial institutions. It gives these uber-large institutions a way to buy and take custody of bitcoin within an end-to-end regulated system approved by the CFTC and NYDFS, and it is "backed" by the reputation of ICE. The venture just went live last week.

Not surprisingly, lots of value changed hands last week as well -- $780 million BTC was moved earlier in the week followed by a $1 billion (94,505 BTC) move that made crypto headlines.

The point is, if you decide to diversify your portfolio with bitcoin you'll be in good company. The largest institutions in the world are preparing to do the same.

The revolution is digital...

Monday, September 2, 2019

How Did Estonia Become More American Than America? By Investing In Blockchain

 “I should have called the Estonians when we were setting up our health care website.”               
                       -Barack Obama

Estonia has become the American dream. The country offers its citizens something it seems Americans can only dream about (we are always dreaming). Blockchain, the technology behind bitcoin, has made the American dream of liberty, freedom and democracy a reality...in Estonia. 

When the world thinks democracy, they think 'America'. They may not think 'United States', but they do think America. That's because America is an ideal, not a place. Like bitcoin, the goal of America is freedom through democratized power; that is, power of the people. I write about this connection in the post: Bitcoin & America Have Common Goals: They Are Linked By The Ideal of Democracy. When I wrote the post I had no idea that a country like Estonia existed. Its discovery has had my attention ever since. And, one thing has been made clear in my research -- Estonia is more American than America. How did this happen?

 

Estonia's digitization


Estonia’s digitization began in 1991. Just after the break-up of the Soviet Union, Estonia restored its independent statehood from the USSR. It was a poor country with little in the way of infrastructure, so it decided to use technology as a way to leverage its scarce resources.  Now, Estonia is using blockchain technology to create the world's most democratized country. I'm going to use the rest of this post to explain how.

First, let me introduce blockchain.

Blockchain is the underlying technology used to create bitcoin, but as Estonia is showing the world, it can be used for many other things. 

At its heart, blockchain technology is 'trust' technology. It comes with a decision framework that replaces trust with consensus. The decision framework within blockchain builds a consensus based on a network of all users rather than a centralized control system. As a result, there is no need for trust. Governance decisions are made by consensus and all data exchanged is protected through encryption (crypto). Put another way, the system is naturally democratized rather than centralized. In this way, it is also self-sustaining. So, when you hear about a system being converted to blockchain, it means the system is being taken from a centralized to a democratized decision framework.

Easy implementation: Digital ID


So how does all this work? Well, every Estonian is issued a digital ID. Much more than a legal photo ID, the digital ID has been "blockchained". That is, it's been democratized on a blockchain platform that uses a 2048-bit public key encryption.

Estonia has been issuing digital IDs for the past two decades. The ID serves as:
  •     a fully encrypted digital passport for Estonian citizens traveling within the EU
  •     a national health insurance card
  •     identification when logging into bank accounts
  •     a proxy for digital signatures
  •     a proxy for i-Voting (public voting occurs online)
  •     a way to check medical records, submit tax claims, etc. (filing a tax return takes less than five minutes)
  •     a way to use e-Prescriptions
The card doesn't just make life easier for Estonia's citizens, it also saves a great deal of time for the government which translates into real savings and a boost to GDP. 

According to a report by PWC, Estonia saves over 1400 years of working time and 2% of GDP annually through its digitized public services. Today, 99% of public services are available to citizens as e-services. Since all transactions are made on a general ledger secured by blockchain-based time-stamping, you also know if someone other than you has accessed your records.  

This leads me to perhaps the most important aspect of Estonia's digitization process -- you own your data. The data may be in Estonia's database, but it belongs to you. You have the right to know and control what happens to the data. In other words, sitting behind the automated governing body is a legal framework that ensures responsible use. Your digital ID (online signature, security, and rights) is protected by law and data integrity is ensured by blockchain technology.

Kersti Kaljulaid
For those that think issuing a digital ID requires a massive financial commitment, you are wrong. A central tenant of the Estonian digitization strategy is the use of cheap technology. Which is to say, this isn't an effort that requires massive fundraising. 

According to Kersti Kaljulaid, "Cheap, common technology that is inclusively used by society as a whole brings much greater benefits than exclusive ones only accessible to upwardly mobile populations." She would know. She is also the fifth and current President of Estonia (in office since October 2016).

Estonia is not alone


Estonia isn't the only country to see the digital light. Germany has given its citizens an ID card with a digital chip, and Finland has joined Estonia on the same data-exchange platform. There are also amazing things happening in Africa, with widespread usage of mobile payments and different practical applications for farmers in Rwanda and Senegal. To read more about the trend in Africa and the Middle East see: Can Digital Currency (Bitcoin / M-Pesa) Wipe Out World-Wide Corruption & Poverty?


Meanwhile, the U.S. is trying to ban bitcoin. The current administration believes bitcoin is a national threat, but I believe banning bitcoin is the national threat and you can read more about my prediction for the U.S. if it bans bitcoin here

It's time for a new paradigm


Named ‘the most advanced digital society in the world’ by Wired, Estonians have Trumped us. We are so far behind the Estonians it's "tremendously" ridiculous (I'm channeling Trump now). If we were to find our way to the highest digital mountain in America, we still wouldn't be able to see the digital dust left by the Estonians. It's that bad.

It's so bad, that Estonians have actually come to expect better services from government than they do from the private sector. 

I don't know where you're from, but think about that. It's hard to comprehend if you're American. This is the American ideal, yes, but we've been told there's no money for anything but war. We're still trying to figure out what happened to trillions of dollars in lost funds (Mark Skidmore, a professor of economics at Michigan State University, found that $21 trillion in unsupported adjustments had been reported -- that’s about $65,000 for every American).  

It's time for Americans to stop dreaming. We need to take our name back from the dollar, adopt bitcoin, and overhaul the government with blockchain technology. 

The revolution is digital...

Friday, August 30, 2019

1,000 Fake Gold Bars Discovered, Bitcoin's 10-yr Alpha is 338,433,233%, and Hong Kong Loves Crypto

What's happening in bitcoin news?

  • Bitcoin's utility over gold has returned as fake gold bars have entered the market.
  • Data shows bitcoin’s performance has outstripped mainstream investments in internet firms since 2010 by 338,433,233%.
  • In Hong Kong, bitcoin is selling at a premium due to mass protests.   

Bitcoin's utility over gold has returned as fake gold bars have entered the market. 

One day back in 2017, someone noticed that two gold bars had the same ID number. Ooops. A Reuters report on Aug. 28 said that nearly 1,000 fake bars were found in the vaults of JPMorgan Chase & Co., one of the major banks at the heart of the market in bullion. 

"The forgeries are sophisticated," said the head of Switzerland’s biggest refinery, according to the article, "so thousands more may have gone undetected".

“The latest fake bars ... are highly professionally done,” said Michael Mesaric, the chief executive of refinery Valcambi. 

(Click here for a report on how to avoid gold scams)

As fake gold bars are being discovered all over the world, the price of gold has actually spiked due to asset quality concerns. Everything is overpriced and central banks are charging investors to deposit funds (negative rates). This is actually fueling more aggressive/risky investing and smart investors are looking for safe alternative investment opportunities like gold, real estate and bitcoin. The same reasons that are driving people to bitcoin are driving them to gold, but gold is flawed for two reasons: 1) it is heavy and 2) it can be faked.

Would you accept gold from someone you don't trust without verifying its authenticity? I like gold, but bitcoin requires no trust. The trust is built into the underlying technology.


Bitcoin’s performance has outstripped mainstream investments


It's not surprising that according to the CEO of blockchain-focused magazine Block Journal, bitcoin’s performance has outstripped mainstream investments in internet firms since 2010 by 338,433,233% based on the following data:


That's a lot of alpha. The price went from just a few cents to thousands of dollars over a 10-year period.

In some places like Hong Kong, bitcoin is even selling at a premium (several hundred dollars).

Why is bitcoin selling for a premium in Hong Kong?


The pro-democracy, anti-government protest movement in Hong-Kong is spurring wider adoption of cryptocurrencies like bitcoin. 

  • Yahoo! Finance reported that the political upheaval in the city "has made local businesses and individuals switch to using non-sovereign and decentralized currency." 
  • Hong Kong department store Pricerite announced that it would begin accepting bitcoin, litecoin and ether.
  • Genesis Block has been operating 14 crypto ATMs across the city. 

That's not all. Earlier this month, protestors initiated an action to withdraw as much money as possible from their bank accounts. The goal: protect personal assets and send a warning to Chinese authorities. It has also been reported that a number of wealthy individuals ($100 million +) have begun moving wealth offshore.

This is happening all over the world and there's a common theme here. Bitcoin and democracy are linked because bitcoin is a democratized form of money, whereas fiat (like the dollar) is a centralized or authoritarian form of money. I talk about this link in the post: Bitcoin & America Have Common Goals: They Are Linked By The Ideal of Democracy.

The Revolution is Digital...

Tuesday, August 27, 2019

Yang Endorses Blockchain, Houston Rockets GM Buys More Bitcoin, and Binance Enters The Lending Game

Three big stories in the bitcoin space I'd like to share with you today: 

  • Bitcoin, crypto, and blockchain have become a 2020 U.S. presidential issue.
  • Daryl Morey, the general manager of the Houston Rockets basketball team, buys more bitcoin.
  • Binance enters the lending game; holders of Binance Coin, Ethereum Classic and Tether will be able to lend assets and earn interest.

Bitcoin, crypto, and blockchain have become a 2020 U.S. presidential issue. Democratic presidential hopeful Andrew Yang endorsed blockchain (the technology that bitcoin sits on) and wants to implement a blockchain based mobile voting system.

"It’s ridiculous that in 2020 we are still standing in line for hours to vote in antiquated voting booths,"
"It is 100% technically possible to have fraud-proof voting on our mobile phones today using the blockchain. This would revolutionize true democracy and increase participation to include all Americans—those without smartphones could use the legacy system and lines would be very short."
-Yang Campaign Website
I couldn't agree more. This isn't surprising coming from Yang -- he's the only presidential hopeful talking about the real challenges facing the economy today, like automation. My personal dream-team is Yang/Tulsi, but I'll save that for another post. 

I became even more interested in Yang after president Trump tweeted that he thought bitcoin and other crypto were "unregulated crypto assets" that can "facilitate unlawful behavior, including drug trade and other illegal activity." The truth is, most drug trades prefer the U.S. dollar.

I doubled down and donated to Yang after U.S. Treasury secretary Steven Mnuchin labelled bitcoin as a national security issue. I started making phone calls for Yang in May, when congressman Brad Sherman made a plea to abolish Bitcoin because he views it as a direct threat to the U.S. dollar. He wants to make the purchase of bitcoin illegal.

Thankfully, we have folks like Yang and Ron Paul coming out in favor of bitcoin because if the US bans bitcoin, it will mean that our fate is tied to the American dollar. You can read more about my prediction for the U.S. if it bans bitcoin in the post: An Argument Against The Ban of Bitcoin: Bitcoin Represents a Threat to The Permanent State, Not America. Namely, it will tie our demise to the U.S. dollar.


In other bitcoin news, Daryl Morey, the general manager of the Houston Rockets basketball team, recently tweeted “I just bought more” in response to a pro-Bitcoin tweet. Morey is not alone. I've seen dozens of tweets like this. There's a long list of celebrities, athletes and musicians that are pro-Bitcoin. Billionaire tech investor Mark Cuban hinted at adding crypto payments last year. Why? Not only does bitcoin represent a safe haven from the coming financial crisis, but it comes with additional technological features that fiat does not, AND, as Obama said, it's like carrying a Swiss bank account in your wallet.

Last but not least in bitcoin news is one of my favorite places to buy crypto: Binance. In terms of new offerings for coins (ICOs), Binance is THE BEST. So imagine my surprise when I heard Binance was getting into the lending game. I'm going to write another post explaining why this is such a powerful move on Binance's part, but the most important takeaway here is that holders of Binance Coin, Ethereum Classic and Tether will be able to lend assets and earn interest through a new service called Binance Lending. Interest is paid out after the loan matures. So, at a time when the world's central banks are pushing negative interest rates, one of the strongest players in the crypto community wants to pay you interest. The irony.

The Revolution Is Digital....