Blockchain Vs. Bitcoin Vs. Cryptocurrency: Dr. Ben Goertzel explains blockchain to Joe Rogan

If you're still curious about the difference between blockchain, bitcoin and crypto, here's a great explanation by Dr. Ben Goertzel.

Cryptocurrency Cheat Sheet (Top 50 Cryptos With Description)

celanbryant.com

Why is it bad when a company buys-back its own stock? They become ZOMBIES, The "Walking Dead" of Wall Street

What happens to companies that buy back their own stock with debt? They become Zombies. The situation gets even worse when companies buy back stock in periods of rising interest rates and at a time when stocks are trading at all time highs.

So, why is it bad when a company buys back its own stock? Here's the answer: EPS is a measure of company performance. It is calculated:

Net Income / Shares Outstanding


Stock prices tend to go up when a positive earnings per share (EPS)  is announced, and down when negative EPS is announced. CEOs and CFOs know this and will do everything they can to "windowdress", especially to disguise a bad year or quarter.

When a company buys its own stock it reduces the number of shares outstanding and increases EPS even though the company made no additional net income. This is how a company can lose money and still have a growing EPS. They will tell you they are doing it as a way to reward the shareholders, which is true as long as the company is cash rich like Intel or Apple, but most companies are borrowing money to finance stock buy-backs, and they are doing it at a time when shares are selling at their highest multiple in years. These companies are referred to as Zombies, they are the walking dead. I did not make this term up. Read more about the rise of the Zombie firm here.

So what? 

What does this mean if you're an investor?

 It means you need to focus on companies with earnings, not earnings per share. If a company isn't making a profit (read: net income goes down), but the EPS is still going up, it's a red flag because this can only happen one way -- if the company bought back shares. It's a super red flag if debt is going up at the same time and the company is using the debt to purchase shares (read: shares outstanding is going down). You don't want to own these companies. These are great short opportunities.

What does this mean if you're a consumer?

 It means companies will be competing for your dollar more than ever. These are hard times for local retailers who must compete against online retailers as well. They also don't have our undivided attention like they did 20 years ago. Which is to say the new entertainment model (Netflix, Amazon Prime, etc) allows most of us to opt-out of watching commercials. Now, retailers are looking for ways to get back in your head. Enter rewards or cash back programs. These programs have become better at reaching a wider audience than a traditional ad or commercial. Not only has the number of programs increased, but the percentage of cash going back to the customer is growing. This will come back to the retailer in one of two ways: 1) it will grow foot traffic at the expense of pricing or 2) it will create  write-offs. Write-offs can be pushed to the next quarter or year and they allow a company to drastically reduce prices in the current quarter. Either way, look forward to heavy discounts this holiday season to increase foot traffic.

Can Blockchain Automate The Middleman For Freelancers

More than a force of change on the business world, freelancers are becoming a competitive advantage because they:

1. are highly flexible,
2. get paid by the task; and,
3. have a high degree of autonomy.

Strategically, freelancers also give employers: the ability to tap into talent outside the local geographic area, the flexibility to cover short-term skill gaps, the luxury of lower overhead and the myriad benefits that go along with increased operational agility.

 

The Middleman

The advantages of hiring freelancers are clear, but the process of finding freelancers can be tedious, frustrating and expensive. Enter the middleman or third-party. Platforms like Upwork and Fiverr are popular, but tend to struggle with a common set of problems to include inconsistent work quality and payment issues.

In addition to these challenges, third-parties also charge fees. Some charge a flat rate fee on all transactions, while others charge variable rates. For example, Upwork charges 20% for up to $500, 10% for up to $10,000, and 5% for over $10,000 per client. Fiverr charges 20% flat. This doesn't include fees on payment options like credit cards, PayPal or bank transfers.

Is it possible to automate this middleman and payment function? Yes, and the name of the technology helping companies do so is called blockchain.

 

Blockchain Automates the Middleman 

Blockchain is the new middleman. It  helps to facilitate the connection between you and the freelancer by serving as a dual-staking system or escrow service. The technology offers companies and freelancers the ability to trust and verify without the need for intermediaries. Once the contractual conditions have been fulfilled, payment is automatically authorized. The set of conditions surrounding the agreement is referred to as a 'smart contract'. No middleman or trust agent is needed because the blockchain is the broker.

Blockchain applications also provide benefits for the freelancer including faster payments,  lower fees, easier access, and contractual incentives like staking. Staking helps freelancers solve the age old "chicken or the egg problem" when starting on a  new platform. A reputation is required to get new gigs, but you need gigs to establish a reputation. With Serve, Instead of having to build a reputation, you can buy your reputation by purchasing a "stake". This form of tokenized reputation encourages  everyone to act ethically because everyone has some "skin in the game".

Most third party platforms are flawed since the middleman charges fees and controls how the connections are made. Blockchain powered with technology has the ability to automate the middleman function giving you all the benefits of hiring a freelancer without the headache.

The future is powered by blockchain.

The Rules of The Simulation & Neuroscience: The Relationship Between You And The Controller

As a general warning to my readers, this article is very different from what I normally write about, but I don't think it's possible to separate belief system from everyday life if you want to live well. And, based on new discoveries in quantum science, separating the two may even be hindering progress in everything we do, especially if we 'believe' the path toward progress is a difficult one. In such a case, we could be the creators of our own hell. Of course the opposite may also be true, which should make this article worth reading.

What Do I Believe? We Are Living In A Simulation

I believe that we create our own reality. I believe we can do this because we live in a simulation. This may seem like science fiction, but there's a dearth of scientific (repeatable) evidence out there that says otherwise.  One of my favorite discussions on the topic is the 2016 Isaac Asimov Memorial Debate: Is the Universe a Simulation?(see below)

Let's assume we're both on the same page and we both believe we are living in a simulation. Now what? The next step is to figure out the rules of the simulation so we can get the most out of this life.

The Relationship Between Newtonian & Quantum Physics

We know the physical rules of the world are based in Newtonian physics: an action or cause creates the effect or reaction.

We also know the rules of the world are based in Quantum physics, the study of matter at the atomic level. At this level, however, the laws are reversed. At the quantum level the action or cause follows the effect or reaction. Again, this is provable, peer-reviewed, repeatable science.

We know a lot about impacting reality on the Newtonian level, but what about the quantum level? What is the quantum level? Why is it there? Who is there?

In the following video, Dr. Joe talks about these questions. Specifically, he discusses the relationship between you and your "self" (the person playing the game). He gives a few ideas on ways you can tap into your infinite self using the laws of quantum physics.

The most common way is to imagine yourself as the person you need to be in order to be the person who does the things you want to do. That sentence takes a bit of unraveling, but here's an example of an exercise that will help.

Before you get up in the morning, transform yourself into the person you want to be in your mind. Walk the way they walk, talk the way they talk. Do the things they do throughout the day. Try to live out the entire day of the person you want to be before you get up in the morning. Don't let yourself get out of bed until you are that person.
 

Why and how does this exercise work: neuroscience

 

Studies show that what you imagine to be happening is actually happening as far as your brain is concerned. Let that sink in for a moment. For example, scientists have shown that if a person imagines eating, if they imagine the entire process and all its sensations as clearly as they can, they will have less appetite for more food afterwards, just as if they've actually eaten. It doesn't stop at mental suggestion. Another study found that just thinking about exercise can build muscle. This puts a different spin on the practice of prayer and meditation.

It is possible to live out the experience you want to have in your mind. If you're really good at this, if you have a vivid imagination, you can imagine whoever you want to be. Masters of this practice can effect change in real-time. And, if we are infinite beings having a finite experience on earth, it would seem that it's the infinite being that operates on the quantum level and the finite being that operates on the physical level. We are both. In other words, if this is a great big simulation, you are the player in a Newtonian world, and your infinite soul is the controller in the Quantum world. You can communicate with the controller with your thoughts. Emotions amplify your thoughts.

Why Is It So Hard To Think About The Life You Want

It should be easy to concentrate on what you want, but it isn't. We are not wired (quite literally) to think that way. In fact, when in survival mode we are wired to think about all the bad things that can happen. Murphy's Law even tells us to expect the worst in order to prepare for the worst, but in a world where thoughts create reality, this way of thinking can be a living state of hell. The person who follows Murphy's Law is in a state of perpetual survival at their own hand.

What happens when you start meditating or praying every morning on who you want to be? As soon as you start to see yourself through the eyes of both you and the "self", it will change the way you view everything.

Suddenly you become more aware of everything around you. You'll start to notice things that weren't there before. Clutter will need to be cleaned, disorganized spaces will need to be organized. You'll start to question actions that don't lead you to where you want to be. You'll break out of your old programming as you create new programming.

Quantum physics tells us that the more you are able to feel that bliss experience in your mind, the more you can expect for it to manifest in your 'reality'. And, when it does, your mind will reward you with the revelation that it can happen again.


Enjoy the game and please share!

Coinpot Faucet Calculator - Update

I’ve had a lot of people ask for an update to my original article. Instead of updating the original chart, I wanted to provide you with a calculator for you to use/share/edit. It’s available in GoogleDocs here: Coinpot Faucet Calculator.

The model is very simplistic, but gives you an idea for what you can earn in one year. It then gives you the ability to see how much that would be if prices go up by the end of the year. Finally, it provides a way to see how much the crypto made from one year using Coinpot will be worth based on growth rates like the ones we’ve seen over the past 10 years. (Click here for a snapshot of historical prices from 2013. Bitcoin is up over 4000% while Litecoin is up over 1000%.)

The spreadsheet provides a calculator for each faucet based on current claim rates. The final spreadsheet is a chart (shown below). It provides a summary of all three calculators.

Keep in mind, the calculator only looks at one year. It also does not include the mystery bonus, offer bonus or mining bonus. I wanted to err on the side of extreme caution, so each calculator only assumes one claim per day.

The base rate assumes no referrals, 1 claim per day and an average of 50% loyalty. The mid rate assumes 100 referrals, 1 claim per day and an average of 75% loyalty. The max rate assumes 500 referrals, 1 claim per day and an average of 100% loyalty. Note, the max rate is not a maximum. It is only used as a max case. Theoretically, there are no limits.

I can personally attest to the mid case. I have around 80 active referrals and only make one claim per day. I’m on track to make more than $235, but that’s because the values above don’t include the mystery bonus or Coinpot tokens, which add up. On average, I get around 3000 tokens per day. Again, I wanted to be very conservative here so those tokens are not included.

You can play with a number of scenarios around loyalty and referrals. While I don’t want to dissuade anyone from doing this, I think referral activity is critical. This way, even if you can’t make daily claims, you’ll still have a growing Coinpot. If you don’t get referrals, this isn’t going to payoff. So, I’ve created a contest for the best referral idea.

 

One final word

A chap recently asked me how to convince people that this isn’t a scam. My answer is: you can’t. But you CAN point out that a scam generally requires you to spend money. Coinpot will never ask you for money. The only thing you are required to give them is an email address.

 

Also, remember that bitcoin is still the world’s fastest growing asset. And, Coinpot is a great way to “get your feet wet” (as one person commented) in the world of cryptocurrency. The learning curve can be steep for some. It’s also a great way to earn bitcoin without having to worry about price fluctuations, providing ID or paying any fees. When the price goes down, the claim is higher. And since I know the price is going back up, it’s an opportunity.

 

Finally, the goal here is not to make a quick buck. You will be disappointed if that’s your goal. This is not a get rich quick scheme. Put simply, this is a great way to earn small amounts of what I believe will be the next reserve currency for the world. It may not be worth much now, but the goal is to hold onto this asset for the long-term (at least 10 years). All you’re risking is your time. Even if you just do it for one year, you’ll always have it and its value will grow over time.

FDIC Chairman's "Living Will" Speech @ Wharton, NY Fed Revises GDP Down, FDIC Publishes Annual Report & Survey Shows Slight Wage Relief

Remarks by Martin J. Gruenberg, Chairman, Federal Deposit Insurance Corporation “Resolving a Systemically Important Financial Institution: A Progress Report”, The Wharton School University of Pennsylvania; Philadelphia, PA


You can learn a great deal by listening to the "public" speeches given by Fed leadership. It's one thing to give testimony on Capital Hill, it's quite another to give a speech in front of people that actually know what you're talking about. In this speech, Gruenberg, the Chairman of the FDIC, discusses the actions taken over the past 10 years to ensure against another "Great Recession".

He discusses the establishment of the Dodd-Frank Act and the authority it gave the FDIC to manage the orderly failure of banks in times of crisis. Among other things, the new authorities gave the FDIC:

        The ability to place the financial firm, including its holding company, into a receivership process;
        An Orderly Liquidation Fund to assure liquidity for the orderly wind down and liquidation of the failed firm;
        Authority to impose a short stay on derivatives contracts; and
        The ability to coordinate with foreign authorities in the case of a firm with global operations.

"The progress has been substantial and I believe not well appreciated," Gruenberg concludes. What hasn't he and his team been appreciated for?


The Evolution of the Living Will Process


As a way to create a framework around an orderly bank liquidation, the FDIC created the living will process. According to Gruenberg, the living will "required both the Federal Reserve and the FDIC to consider the objectives of the process, the standards and the guidance that would need to be provided to the firms to achieve the objectives, and the means of engagement with the firms to assist them in following the guidance". This process required banks to provide a description of the following:

    The firm’s strategy for orderly resolution in bankruptcy during times of financial distress;
    The range of actions the firm proposes to take in resolution; 
    Liquidity and capital needs and resources of the firm;
    A description of the firm’s organizational structure, material entities, interconnections, and interdependencies; and
    The firm’s corporate governance process. 

The only thing that really matters here is liquidity. With the right liquidity and capital resources, any crisis can be avoided or at least pushed off, but for how long?


The truth is, none of these changes would have saved Lehman Brothers or Bear. None of these resolutions would have made AIG confess to creating bad securities. The truth is, everything happened exactly how the banks wanted it to happen. They got a huge bailout, 10 years of free money, and trillions in reserves at the Fed. To top it all off, Dodd-Frank approved a resolution to pay banks for those reserves. Who pays the interest? We do. The American taxpayer. We don't control rates or the amount of reserves held at the Fed, but we have to pay whatever rate the Fed sets on those reserves. Sounds fair. This is why people are gravitating toward Bitcoin and precious metals.

In other news, Nowcast is a forecast of the upcoming GDP announcement. It was updated and revised down to 3.11%. The leading causes are due to a decline in:

•     capacity utilization,
•     industrial production,
•     general business conditions (as reported in a daily brief last week); and,
•     retail sales.

In other words, all things driven by consumer demand are starting to decline, while anything driven by debt (inflation, pricing and housing) are on the rise.

The Empire State Manufacturing Survey/Business Leaders Survey included a supplemental survey on wages, a critical piece of the consumer demand equation. Wages are of key interest because without wages, GDP will continue to fall -- not everyone has access to massive amounts of debt. What does the survey show? Job openings are taking longer to fill, manufacturers are hiring more, and starting pay is going up. Will it be enough to impact earnings? My guess is no. Why? Wall Street doesn't like wage increases.

What Is The "Repo Market" & Why Did The Fed Bail It Out In September 2019?

This post is about the September 2019 bank bailout related to the repo market. It will provide answers to the following questions:

1) what is a repo? 
2) how are banks being bailed out?
3) why is the bailout happening?
4) what does it mean for the great value migration?
5) what can you do?

First, let's understand why the bailout is so important.

Why is the September 2019 bailout so important?

The September 2019 bailout is important because the Federal Reserve is pumping money into OUR economy, non-stop ($260 billion in assets to the Fed’s balance sheet since mid-September). Yet, we have heard little about this. When the Fed bailed out banks in 2008, it was alarming. Everyone knew about it, today, only the business community is covering it.

Why is this bailout happening?

A large bank probably went bust in September. We'll never know which one because it was "bailed out".

How are banks being bailed out?

The Federal Reserve is pumping large amounts of money into the economy every night through an overnight lending program they have set up for banks. For a small fee, banks can make sure they have enough cash to stay open tomorrow. If there's a large demand for overnight funds, the fee goes up. In September, the fee went up so much due to the demand for overnight funds, the Fed had to step in to assist. In other words, the Federal Reserve had to step in to guarantee funding for any bank that needed it.

What is a repo?

A repo is short for repurchase agreement. This is the name of the banking product used to make overnight loans. In the same way that a mortgage is the name of the banking product used to make loans for houses, a repo is the name of the banking product that is used to make overnight loans.

So, when people talk about the Fed bailing out the repo market, they are referring to another massive bailout for the loan market, except this time it's the overnight lending market (repos) not mortgages (mortgaged backed securities).

What is the size of the repo market?

The repo market is huge. According to the Securities Industry and Financial Markets Association, the average daily repo volume in 2018 totaled nearly $2.2 trillion. So the repo market – with about $2.2 trillion outstanding – blew up in mid-September and repo rates spiked to 10%. Then, the Fed stepped in with a bailout.

Why is the Fed allowed to do this?

In 2008, it was decided that certain banks were deemed "too big to fail". As a result, the Fed has the precedent authority to bailout any large bank. So, we'll never know what large bank was bailed out this time (perhaps JP Morgan), but we do know that it took a massive amount of cash to do so. We also know that the Fed is playing this by ear. In fact, they have no idea what's happening. The new Federal Reserve Chair has openly stated his ignorance regarding next steps. This is even more evident in the announcements made by the Fed's trading desk. Brad Huston on Twitter provides a good overview of the Fed's announcements through Twitter below.

High Level Overview

We got in the weeds there so let's pan out for a moment. 

What are the main takeaways from this?

1)  The Fed just bailed out another massive bank (at least one). And, it will continue to do so until the U.S. dollar collapses.

2) The Federal Reserve will do everything it can to prevent a recession. This is a new development in economic theory. It used to be that recessions were an inevitable part of a market economy. Now, they aren't allowed.

What does this mean from an investment perspective?

Ultimately, it means that if you're just listening to MSM, you could be on the wrong side of many trades. It's time to take all the cash you can afford to lose and invest it in the stock market. The Federal Reserve, through its repo program (lender of last resort) and quantitative easing program (buyer of last resort), will continue to support or bailout any issue related to the stock market. The Fed knows the stock market is the primary indicator of economic health for most folks, so it will continue to prop it up by buying assets. This is why the Fed and central banks across the world are pushing rates lower (see article on negative rates below). All that cash has to go somewhere, and it's going into the market. The best thing you can do for your portfolio is buy on dips. 

How does this relate to the Great Value Migration from the dollar to bitcoin?

While it's time to invest your "extra" cash in the stock market (especially the ones that make up the major averages (DJIA, S&P, NASDAQ)), it's also time to start putting the cash that you can't afford to lose in safer places. This means assets that aren't associated or "backed" by a certain institution or counterparty, i.e, real estate, bitcoin, precious metals, artwork, jewelry. That way, if the market fails, it won't impact the intrinsic value of the asset you hold.

What is Counterparty Risk & Why You Don't Want It?

In the financial world, "backing" is referred to as a "counterparty". A counterparty can be a bank, the Federal Reserve or any institution that's willing to "back" an asset. So the risk associated with buying assets that are backed by a certain institution is referred to as counterparty risk. Almost all assets in the market, except for the ones listed above, gain value from the counterparty backing. The dollar is backed by the Federal Reserve. Stocks are backed by the company. Mortgaged backed securities are backed by the people paying the mortgages. Repos are backed by the lender. Bitcoin is backed by the people that use it (no counterparty). Gold is backed by its own intrinsic properties (no counterparty).

The great value migration refers to the migration from currency "backed" by central bankers to currency with no counterparty risk, like bitcoin and gold.

Get ready. We're crossing the Rubicon. 

If you're hungry for more on this subject I recommend:

Max Keiser's video, click here.

To read more about how central banks are becoming insolvent read my article on SeekingAlpha.

To read more about negative rates and what Greenspan, Warren and Cramer think, read my article on negative rates by clicking here.

To read more about the impact of the great migration on the dollar, read my article on the ban of bitcoin and its implication for America.

To read more about the current market phenomena of debt deflation and its impact on the global economy, click here.

The FDIC Lowers Credit Standards, Household Debt Jumps, General Business Conditions Fall & There's An Increase in Jumbo Loans

 

 

On February 14, 2018, the FDIC Board of Directors adopted a rule to permit the removal of "external credit ratings". 

 

"The final rule removes references to external credit ratings and replaces them with appropriate standards of creditworthiness."

In other words, as long as a bank makes under $1 billion in total assets it doesn't need to reference external credit ratings in order to label an asset or security as "investment grade".  These classifications are used for capital allocation and pledged assets. The rule reduces the need to classify assets as investment grade with a much lower bar -- as of this ruling "An entity has adequate capacity to meet financial commitments if the default risk is low, and the full and timely repayment of principal and interest is expected."

The rule also "adds cash to the list of assets eligible for pledging and separately lists Government Sponsored Enterprise obligations as a pledgeable asset category."

So mortgaged backed securities are now considered pledgeable assets as well as cash? And, if you have cash, why do you need to pledge assets?

Household Debt Jumps as 2017 marks the 5th consecutive year of annual growth based on the latest Quarterly Report on Household Debt and Credit. 

 

The report reveals that total household debt reached a new peak in Q4 of 2017, rising $193 billion to reach $13.15 trillion. Balances climbed:

• 1.6% on mortgages, 
• 0.7% on auto loans, 
• 3.2% on credit cards; and, 
• 1.5% on student loans.

This adds to the market's general instability, but we're not hearing anything about that from the Fed. It's also important to remember that debt is a form of inflation. It's essentially the creation of money out of nothing. Due to quantitative easing, banks have an unprecedented level of capital to "lend" and it's pumping all that "fake cash" into the market every day via mortgages, auto loans, credit cards and student loans. Asset values are the highest they've been in years, far surpassing what they were in 2007, jut prior to the Great Recession. Gas prices have been on the rise since July of 2017, still inflation is low and steady. Clearly there's some manipulation at play.

According to the Empire State Manufacturing Survey, a monthly survey of manufacturers in NY conducted by the Federal Reserve, the general business conditions index fell five points to 13.1.  

 

This suggests a "slower pace of growth than in January".  This at a time when the stock market was setting new highs. Perhaps the most notable takeaway is a remark about input prices and prices paid which confirms a theory of higher inflation. According to the report, "Input price increases picked up noticeably, with the prices paid index reaching its highest level in several years." The highest level in several years is quite significant. So companies are paying more for inputs and they are charging more for products and services. I wonder who is paying for those products and services?

 

A report by the Fed regarding jumbo loans -- these are loans that are over ~$625,500 -- suggests the number is growing.

According to the Fed, there's been a marked increase in the number of jumbo loans on the market today. This isn't surprising because banks have an unlimited amount of capital to lend due to quantitative easing and the $2.2 trillion sitting in reserves at the Fed. This post shows how "the supply of jumbo mortgages has improved in recent years as banks have become more willing to take on mortgage credit risk on their own balance sheets".

Final Thoughts: The Fed has been waiting on inflation to go above 2% to raise rates. The truth is, inflation has been over 2% since 2008. It went up and never really came back down. Meanwhile, the Fed kept rates artificially low and corporations have taken advantage of the loophole by using stock buybacks to artificially push up earnings. Now it's too late to raise rates, the economy is about to crash on its own.

3 Quick Reasons Why Bitcoin is About To Go Up

Everyone wants to know when the price of Bitcoin is going back up. In this very brief article I'm going to give you three reasons why the price of Bitcoin is about to go up and well past $20K by the end of the year.

Reason #1: The price of Bitcoin and cryptos in general falls every year in Q1. Each year, the price rebounds and soars by the end of the year.

As you can see from the charts above, this is a normal trend for Bitcoin and one that the community has come to expect. 

Reason #2: Despite the call for regulation by central banks, nation states are starting to realize their own power. While the SEC and CFTC battle over who gets to regulate cryptocurrency, Arizona just passed a bill allowing it as a form of payment by the Department of Revenue. In other words, you will be able to pay your Arizona taxes in Bitcoin. There's also a resolution passed in Congress calling for a pro-bitcoin national policy.  When/if that resolution gains traction, the price of Bitcoin will soar.

Reason #3: Third and perhaps most importantly, hedge funds and other large institutional players are just now getting into the market. They could not enter the market prior to Bitcoin futures which started in December 2017. Below is one of my favorite videos in support of this, hedge fund manager clearly explains what institutional players are doing right now.

It might take six to eighteen months, but Bitcoin is a much more valuable way to store your digital currency. Remember, only 9% of the world's currency is physical, the rest is digital. Institutions get it and they're getting on board.

Final thoughts: Bitcoin is extremely volatile. For this reason, you don't want to buy at the highs, but rather the lows. Bitcoin is officially in a low cycle and now is a great time to buy. If you don't buy now, save up to buy next year at this time.

Where to buy? You can buy Bitcoin from an exchange (Binance or Local Bitcoin) to hold yourself or you can purchase an investment product, like an IRA. Bitcoin IRAs have the same tax treatment as traditional IRAs.

Corporate "Skin in the Game", The Real Reason The Fed's Raising Rates, SECs 3.5% Budget Request Increase, The SECs New SCSD Initiative and Misleading Oil Prices

"Does More "Skin in the Game" Mitigate Bank Risk-Taking?"

This is one of those articles the Federal Reserve releases that has absolutely no application. It's asking if increased capital requirements help banks to reduce the amount of risk they take. The answer is OF COURSE!!!!! Are you kidding me?

This is like asking if someone feels the same if they lose their money or someone else's money. That said, I think this article has more application than the title gives it credit for. Here's a quick excerpt from the article:

Excessive risk-taking by banks has long been a paramount concern of regulators. The basic problem arises in part due to misaligned incentives; under the current limited (single) liability structure, shareholders of a failed bank can lose no more than their initial investment. With this limited skin in the game, bank shareholders’ private incentives may lead them to take more risk than is socially optimal. If, by contrast, shareholders were liable for the entirety of a bank’s losses, their private risk-taking decisions may be more aligned with socially optimal risk‑taking.

So,  instead of looking at this as a consideration for banks, let's extend it. This should be a consideration for all stocks. Perhaps the issue with the corporate state is that the shareholders don't have any personal liability. They are limited in the amount they can lose. What if the shareholder had to worry about being liable for legal or environmental issues? What if the shareholder had to worry about being sued for the corporation's irresponsibility? I suppose a lack of earnings equates to a sell-off, which is the ultimate punishment for the corporation.

Final thoughts: This article does nothing but shed light on the fact that we still have an incredible amount of power over the corporate state. Anything that can hurt earnings is a threat to the corporate state, including its own hubris. Couching gambling schemes in terms of limited liability structures doesn't hide what's happening. If anything, it is a concession to the system's vulnerabilities.

______________

The Overnight Bank Funding Rate currently stands at 1.42%. Do not be confused. This rate is based on the interest rate on excess reserves (IOER rate), which is not the same as the interest rate on required reserves (IORR). Currently, both rates are the same, however (you can view both rates here)

 
https://www.federalreserve.gov/monetarypolicy/reqresbalances.htm

If you're old like me, you remember when the rate was referred to as the fed funds rate. The name was changed when banks were given the ability to charge interest on reserves in 2008. Once this deal was made, the Fed started giving out "reserves" like candy in a scheme referred to as quantitative easing. Today, over $2.2 trillion sits in reserves at the Fed and we (the United States) are paying interest on all those reserves, both at the IOER and the IORR.

The overnight bank funding rate is reported every day. It will never be higher than the rate banks can get from leaving money at the Federal Reserve (IOER or the IORR).

Final thoughts: Every now and then I like to revisit this issue of rates. I hear people wondering if the Fed is going to raise rates and I wonder if they understand what's really going on. Ultimately, the real reason why the Fed is going to raise rates has very little to do with the state of the economy. And, the higher rates go, the more banks get paid. The issue for banks is that inflation is a four letter word. It means lenders will be paid back with less money. If you own $100,000 on your home, and the value of the dollar tanks by 50%, you still owe 100,000 of those dollars, but they're only worth $50,000. Inflation is great for borrowers. So, the game the Fed has to play is -- how do we make sure people still believe in the value of the dollar while raising rates? It has nothing to do with cooling off the economy.

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The next article is about Deutsche Bank. The bank will have to pay $3.7 million to customers for misleading them about mortgage backed security prices. What's interesting to me is that this is supposed to be a fair settlement.

To settle the charges, Deutsche Bank agreed to reimburse customers the full amount of firm profits earned on any CMBS trades in which a misrepresentation was made.  According to a payment schedule in the order, Deutsche Bank will distribute more than $3.7 million.  Deutsche Bank also agreed to pay a $750,000 penalty.  Solomon agreed to pay a $165,000 penalty and serve a 12-month suspension from the securities industry.

$3.7 million is nothing in the trading world. We are supposed to believe this is the full amount of the profits made? What's funny is that the SEC apparently believes it. They also think that a 12-month suspension from the securities industry and a $165K penalty is going to stop this kind of activity. The penalty is nothing compared to rewards, even if you do get caught.

Final thoughts: As I've said before, the SEC has been rendered toothless over the years. What's funny is that the very banks that gutted the SEC's power are asking for its protection against Bitcoin. Good luck with that.

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As an extension of what's going on at the SEC gutting, I think it's interesting that the SECs budget request is 3.5% higher than it was last year.  

In order to keep up with the rapid pace of technology advancement in the areas the SEC regulates, the request seeks a $45 million increase in funding for information technology enhancements to support the agency’s cybersecurity capabilities, risk and data analysis, enforcement and examinations, and automation of business processes. The fiscal year 2019 budget request level is a 3.5 percent increase over the fiscal year 2018 budget request of $1.602 billion.

The total request is for $1.658 billion.

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On Monday, the SEC launched the Share Class Selection Disclosure Initiative (SCSD) to encourage self-reporting. The SEC has no way to enforce this really -- how can they enforce fiduciary responsibility when its antithetical to capitalism? So they've created a hotline to encourage self-reporting. This is also funny. Here's an excerpt that sums up the effort:

The Commission has long been focused on the conflicts of interest associated with mutual fund share class selection. Differing share classes facilitate many functions and relationships. However, investment advisers must be mindful of their duties when recommending and selecting share classes for their clients and disclose their conflicts of interest related thereto. In the past several years, the Commission has charged nine firms with failing to disclose these conflicts of interest. These actions included significant penalties against the investment advisers, and collectively returned millions of dollars to clients.

The reason this won't work is because there's no motivation to self-report. Advisers have to pay back all ill-gotten gains and admit to their customers that they mislead them, but the SEC won't impose a civil monetary penalty? C'mon.

Under the SCSD Initiative, the Enforcement Division will recommend standardized, favorable settlement terms to investment advisers that self-report that they failed to disclose conflicts of interest associated with the receipt of 12b-1 fees by the adviser, its affiliates, or its supervised persons for investing advisory clients in a 12b-1 fee paying share class when a lower-cost share class of the same mutual fund was available for the advisory clients. Among other things, for eligible advisers that participate in the SCSD Initiative, the Division will recommend settlements that will require the adviser to disgorge its ill-gotten gains and pay those amounts to harmed clients, but not impose a civil monetary penalty. The Division warns that it expects to recommend stronger sanctions in any future actions against investment advisers that engaged in the misconduct but failed to take advantage of this initiative.

Final thoughts: Initiatives like this are the reason why the SEC is absolutely ineffective. 

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Finally, the Fed issued their weekly report on oil prices. It says that a "large drop in demand expectations decreased oil prices significantly". As a trader of crude oil, I know that the price of crude oil has gone nowhere but up since the middle of last year so I find this pronouncement humorous. Please note that gas prices are a key part of inflation. In fact, the Fed/FOMC credit low inflation with declining oil prices. In other words, the Fed is actively trying to suppress the true price of oil because.


Final thoughts: The Fed's pronouncements are incongruent. The headline is the opposite of the points used to prove the point. The headline reads "Gas prices down", while the bullet points read, "Gas prices headed up." This is a classic case of someone being told what to say when they don't have the data to support the conclusion.

Trump’s New SEC Chairman Fighting For Control Over Bitcoin

Summary

• Many people are interested in cryptocurrencies, but are concerned about government intervention.
• The SECs Chairman Jay Clayton made a statement about cryptos last month that was largely overlooked.
• Clayton is doubling down on the “21(A) Report” at a time when his regulatory counterpart is embracing Bitcoin.
• It appears a showdown is brewing: who controls the regulation of the fastest growing asset in the world.

I enjoy talking to people about the viability of bitcoin. It appears to have a different value proposition for everyone. For some, there is no value proposition because they are certain the government is going to shut it all down. These people are not stupid — they know their government. For this reason, I think it’s important to track statements made by government institutions like the Federal Reserve and the SEC pertaining to Bitcoin, cryptocurrencies and ICOs.

SEC Chairman Jay Clayton

 

On December 11, 2017, the SEC issued a statement regarding Bitcoin and cryptocurrency.

“This statement,” said SEC Chairman Jay Clayton sworn in by Trump in January of 2017, “provides my general views on the cryptocurrency and ICO markets…

Among the more interesting points Clayton points out in his statement are the following:

1) “to date no initial coin offerings have been registered with the SEC.”

2) “The SEC also has not to date approved for listing and trading any exchange-traded 

products (such as ETFs) holding cryptocurrencies or other assets related to cryptocurrencies.”

3) “If any person today tells you otherwise, be especially wary.”

Translation: The SEC has not approved any crypto or ETF.

“Please also recognize,” Clayton goes on to say,

that these markets span national borders and that significant trading may occur on systems and platforms outside the United States. Your invested funds may quickly travel overseas without your knowledge. As a result, risks can be amplified, including the risk that market regulators, such as the SEC, may not be able to effectively pursue bad actors or recover funds.

It is Clayton’s job to protect investors, but I think he goes beyond that role here. In particular, he tells investors to be weary because at any point in time someone could run away with your money overseas — as if this can’t happen with other investments.

This is a specious argument. Your invested funds may quickly travel overseas if you invest in stocks as well. In fact, they very likely do. Corporations spend the money we invest with them overseas all the time, why not? So yeah, this is a risk, but nothing we aren’t already very much accustomed to with our current system of currency, which is over 90% digital.

On a good note, regarding ICOs, Clayton believes that:

initial coin offerings — whether they represent offerings of securities or not — can be effective ways for entrepreneurs and others to raise funding, including for innovative projects.

So that’s good, but he goes on to say that:

replacing a traditional corporate interest recorded in a central ledger with an enterprise interest recorded through a blockchain entry on a distributed ledger may change the form of the transaction, but it does not change the substance.

Translation: “The reason I like ICOs is because they’re essentially IPOs. If these are really IPOs, I (the SEC) should be regulating them.”

The 21(A) Report

 

Clayton has two options regarding his views on crypto. He can say that ICOs and cryptos are legal or illegal. Here Clayton does not mix words. He urges market professionals to use a document referred to as (the “21(A) Report”) as legal precedent. The 21 Report is an investigative report released in July of 2017 in the SEC vs. The DAO.

“In the 21(A) Report,” Clayton says,

the Commission applied longstanding securities law principles to demonstrate that a particular token constituted an investment contract and therefore was a security under our federal securities laws.

He goes on to say that,

brokers, dealers and other market participants that allow for payments in cryptocurrencies, allow customers to purchase cryptocurrencies on margin, or otherwise use cryptocurrencies to facilitate securities transactions should exercise particular caution, including ensuring that their cryptocurrency activities are not undermining their anti-money laundering and know-your-customer obligations.

Or what? This statement may sound threatening to those worried about government intervention, but it’s more like the roar of a toothless tiger. Money laundering disclosures are a joke in the financial industry. Just during the week of Christmas, the Federal Register announced that the Trump Administration would be waiving fraud and corruption fines for Citigroup (5-year exemption), JPMorgan (5-year exemption), Barclays (5-year exemption), UBS (3-year exemption), and Deutsche Bank (3-year exemption). This is the same list of megabanks that the Obama Administration extended one-year waivers to as well, though it is particularly troubling that Trump, unlike Obama, owes these banks a large amount of money. Even if the exemptions weren’t in place, any fines rendered are a tenth of a percent of the profits made. What’s ironic is that the SEC has been rendered impotent over the last five years by the very institutions that are asking for its protections today.

 

What’s Next: Wall Street Is At Odds With Itself Over Bitcoin

In my next article we’ll continue to look at the battle brewing between the CFTC and the SEC. Both want control over this growing industry. On the one hand government regulators like the SEC want to shut Bitcoin down. On the other hand, the CFTC recently approved bitcoin futures contracts for several institutions including the CME, CBOE and Cantor Fitzgerald. Both sides have many stakeholders with deep pockets. My money is on Bitcoin.

Disclosure: I am/we are long cryptos. I wrote this article myself, and it expresses my own opinions.