Destiny Calls - The Tribulation & Creative Destruction
Updated
Disclaimer:
This post will be heavy speculation - but let's have some fun. Let's play this fun game as a mental exercise. In no way is any of this financial advice, nor in any way political, nor does it even reflect my opinion. It is just a mental exercise. I fully admit that economics is not my background, so I will be taking a different approach to forecasting this market. I don't post for recognition, to market anything, or for money, or to advertise my position. I post only to develop my own craft, and to discuss openly.
I think that the stock market serves two purposes:
1. It's a casino. It's really shiny and gets you really emotional. It splits you into teams - bull and bear, retail and institution, them and us. You might win for a while - a long while, if you're good, but in the end, the house always wins... and you are about to see that - I think. Anyway, it distracts people from the real game. Not played with fun coupons, but with actual money.
2. It's a training ground... for those that are going to run the economy some day.
First of all, M1:
What happened?
thestreet.com/mishtalk/economics/whats-behind-the-surge-in-m1-money-supply
I think this can be explained in short, by the Fed increasing their leverage. They are increasing their control over assets, while taking on more risk.
State of the Economy:
GDP/CPI Forecast:
GDP Forecast:
CPI Forecast:
NSCC-2021-801:
dtcc.com/Globals/PDFs/2021/March/05/SR-NSCC-2021-801
This should be looked into. It looks like the Fed is gearing up for something.
Everything seems to align for around March 19:
The Fed's Tools:
investopedia.com/articles/economics/08/monetary-policy-recession.asp
- Yield Curve Control (leads to inflation): realinvestmentadvice.com/the-next-iteration-what-is-yield-curve-control/
- "Open Market Operations": Basically they can buy Treasury bonds, to manipulate interest rates.
- "Influencing Market Perceptions
The final tool used by the Fed to affect markets an influence on market perceptions. This tool is a bit more complicated because it rests on the concept of influencing investors' perceptions, which is not an easy task given the transparency of our economy. Practically speaking, this encompasses any sort of public announcement from the Fed regarding the economy."
Basically, their final "tool" is to lie!
Economics and Game Theory are beautiful. In a vacuum, in economics, actors will always act rationally. In its essence, the market, and the economy, is just one thing paired against another, right? All it is is a game, to see how many of one thing you can exchange for another thing, that the other person owns. That is why Game Theory, Dow Theory, Supply and Demand, and all forms of psychology work in the market. It's really a game of accumulating Debt.
G30 Reports on COVID-19:
"COVID-19 triggered a historic collapse in peacetime economic activity. Every indicator continues to point to a multiyear crisis with long-lasting repercussions. With extreme poverty, hunger, and deprivation rising for the first time in decades around the world, as many as 100 million more people could be living on less than US$1.90 a day in the wake of the pandemic."
"Policymakers need to act urgently, as the solvency crisis is already eroding the underlying strength of the business sector in many countries. The problem is worse than it appears on the surface, as massive liquidity support, and the confusion caused by the unprecedented nature of this crisis, are masking the full extent of the problem, with a “cliff edge” of insolvencies coming in many sectors and jurisdictions as support programs lose funding and existing net worth is eaten up by losses.
"The first wave of liquidity-focused policy measures has prevented much more severe consequences for the corporate sector, jobs, and for the economy more broadly. As the crisis progresses, jurisdictions now need to develop policy responses that accommodate structural changes in the economy triggered by the pandemic, and address the following problems that make the initial response unsustainable:
- A level of public spending that would be unsustainable over the potential duration of the ongoing economic crisis..."
"Some sovereigns, most of them investment-grade, were able to borrow in the international capital markets since February of 2020, but an unprecedented number of countries saw ratings downgrades. No Sub-Saharan African country has borrowed in the international capital markets since February 2020"
No Debt, this is not allowed.
"We reject the view that the worst of the crisis has passed."
"Remaining uncertainty must not become an excuse for inaction."
"Advanced economies have responded to uncertainty with domestic measures that match our assessment of the gravity of this crisis. Governments there have found innovative ways to expand central bank balance sheets and run double-digit budget deficits, established multi-trillion dollar facilities to bolster market liquidity and credit flows, and enacted emergency measures to help cash-strapped people and firms, but only at home."
"Existing crisis management and debt restructuring institutions are an increasingly poor fit for today’s mix of actors and problems. New creditors—bond holders, China’s policy banks, hybrid and commercial actors represent the bulk of debt payments from low-income countries in the wake of the pandemic shock. Adapting the international financial architecture to these and other new stakeholders will take time. Urgent responses to the pandemic cannot wait for this process to run its course."
New actors are accumulating Debt, this is double not allowed.
"At this preliminary stage, we have reached consensus on the following recommendations in each of the seven areas:
- The International Monetary Fund (IMF) should mobilize global liquidity on a larger scale than ever before in the face of uncertainty, scale up its crisis lending in low-income countries, and use far more of its existing non-concessional resources to mitigate economic fallout from COVID-19. We call on IMF members to commit to two new SDR $500 billion allocations that could be implemented rapidly in response to future shocks or serious economic deterioration. Separately, IMF members should agree on a mechanism for re-allocating existing SDR to the most vulnerable among them. The Fund needs to double its concessional lending capacity, exhausted early in this crisis, to enable it to respond nimbly to large-scale outflows in multiple vulnerable countries. It should signal willingness to use far more of its ample non-concessional resources to support middle-income countries in the face of uncertainty.
It means that more debt will be accumulated from emerging nations.
- The World Bank Group and the growing array of regional development banks have a critical role to play in preventing the COVID-19 shock from turning into a global humanitarian crisis, fueling inequality and social strife. They need to find creative ways to maximize their concessional “surge” capacity as part of a coherent multilateral framework, avoiding duplication.
- “Whether China decides to join the Paris Club, to pursue a complementary forum for some or all of its lenders, or both, we remain convinced of the need to reinforce the long-standing international comparability norm."
"Although China has engaged in overseas lending for many decades, it has since the early 2000s gradually become a leading creditor to emerging economies, and remains by far the dominant creditor in some of the most vulnerable among them. Low-income countries’ outstanding debt to China’s government and its state-owned lenders exceeds both bond claims and the claims of Paris Club creditors. While China’s Ex-Im Bank has renegotiated some of its exposure in conjunction with DSSI, projected debt repayments to China also top repayments to traditional bilateral creditors, owing in part to market-based commercial interest rates on loans by China’s policy banks. For many emerging market countries in debt distress, it would be virtually impossible to achieve sustainability without implicating their debt to China. High concentration of exposures in a small number of countries poses an additional challenge. China’s successful integration in the informal sovereign debt restructuring regime would be an investment in the broader regime, and should help it adapt to future changes.
To implicate debt - Debt Financing: investopedia.com/terms/d/debtfinancing.asp
“China can lead by example, joining the Paris Club with respect to its official claims, and restructuring its hybrid and commercial claims in a similarly transparent multilateral forum.”
"The prospect of a better-fitting restructuring forum in the future cannot excuse inaction today. Going forward, there is a strong case for a debt restructuring forum where institutions that combine features of official and commercial creditors would coordinate among themselves and with other stakeholders in a sovereign debt restructuring."
There will be a restructuring of debt, where official and commercial creditors will coordinate.
"Adapting crisis management and debt restructuring institutions to reflect China’s role and those of other new stakeholders is vital, but it will take time. Urgent response to the pandemic cannot wait for the adaptation process to run its course."
Will the game be shut down, before it is too late?
Sovereign Debt will be an important topic ahead:
- "Inadequate sovereign debt and debt restructuring disclosure results in a faulty patchwork of information about direct and contingent claims against sovereigns. Sovereign borrowers should include robust disclosure requirements as part of public debt authorization, including guarantees and other forms of engaging the credit of the central government.
Risks associated with formally and informally secured debt and project finance need to be carefully managed.
"Sovereign borrowers should establish and publicize robust debt disclosure requirements as part of public debt authorization, including guarantees and other forms of engaging the public credit."
“Meaningful disclosure should be a necessary condition for contract enforcement.”
"Recent collaboration between international financial institutions and market participants to create and operationalize a platform for debt contract disclosure is a step in the right direction. Information about public debt
should be made available on a public platform. Although research institutions and private trade associations may be able to host such information, public debt transparency is simply too important to be left to the vagaries of private finance and the interests of academics.
Proposals for contingent sovereign debt instruments have a long history, but have, for the most part, failed to gain acceptance in the sovereign debt markets. Designs such as GDP-indexed bonds sought to move away from the basic structure of fixed rate sovereign bonds, without much success. Researchers at the IMF and at the Bank of England have elaborated multiple design options to suit different economies...
GDP-linked instruments have not found a broad market, in part because of concerns that GDP is measured by the issuing government. Commodity linked instruments have the advantage of being priced relative to a global market, and of providing greater relief in the event of most shocks. Commodity prices are typically more volatile than output. To date, though, such instruments have not been used even in cases where there would be obvious advantages to better
aligning external debt service to a country’s dominant export proceeds. Venezuela remains in default on its external sovereign bonds, and an oil-linked instrument would clearly align payments to payment capacity. If such options are fundamentally undervalued by the market, they cease to be attractive even in a restructuring case, as creditors may put an extremely high premium on fixed payments that push the burden of managing commodity price volatility entirely on the debtor, absent restructuring or default."
“We favor contingency features framed broadly, because it is very hard to predict any given shock with precision: hurricane clauses do not help in a pandemic.”
"Broadly written options offer clear advantages to the sovereign borrower and its creditors. Because existing contingency triggers are written narrowly, they insure against a narrow category of risks. Such contracts, by design, do not protect against unforeseen risks. Hurricane bonds do not help in a pandemic, even though the pandemic may end up having a more catastrophic economic impact on tourism-dependent islands. An option that allows the sovereign borrower to defer payments for any reason, for a limited number of times, delivers relief without the cost of default, such as credit ratings downgrades. Creditors avoid the uncertainty and collective action problems that come
with renegotiating contractual terms in the event of an unforeseen shock. More powerful contingent instruments would automatically reduce interest payments and defer principal payments in the event of a shock beyond the issuer’s
control, whether from hurricanes, earthquakes, or pandemics. They would go beyond providing relatively easy-to-price flow relief, and offer broader downside protection, such as interest forgiveness, in the event of natural disasters.
Fear of a credit downgrade and its consequences, well founded and otherwise, can delay necessary debt restructuring, which in turn harms sovereign borrowers’ economic and financial prospects in the medium term. Major credit rating agencies assign default ratings to sovereign debt in the event of failure to pay principal or interest on debt to private creditors, a distressed debt exchange to avoid payment default or unilateral change in payment terms, so long as the new terms reduce the original payment obligation. Although ratings methodology allows for discretion, sovereign borrowers perceive the action as automatic. Some credit rating agencies have put countries on downgrade watch in anticipation of a restructuring. Countries could expect to be upgraded quickly after a restructuring that improved their debt sustainability or debt repayment profile, but not after a restructuring that brought no durable relief.
In some cases, changes in sovereign ratings may also raise concerns about financial stability and market liquidity."
“Fear of a credit downgrade and its consequences, well founded and otherwise, can delay necessary debt restructuring, which in turn harms sovereign borrowers’ economic and financial prospects.”
Is Blockchain coming to sovereign debt instruments? This screams smart contracts, don't you think? The question is... is it Bitcoin? Ethereum? Or IMF's own? I will dive deeper into this below...
G30 Core Principles in the reviving the Corporate Sector after COVID-19:
- Focus on the long-term health of the corporate sector. The duration of the pandemic forces us to focus on structural issues and solvency, rather than buying time through a focus on liquidity. This also means we need to shift from broad-based to targeted measures, allowing reallocation of resources to occur.
Expect trend changes, expect distribution of tech talent. FAANG valuations will fall. Good luck programmers, I hope you enjoyed your boom cycle and invested well. No, LC will not save you this time.
- Focus on the most productive use of resources. It is critical at this stage that public policy is geared towards a strong economic recovery. This is one reason for taking advantage of private sector capacities where they exist, in order to leverage scarce public resources and to make use of private sector expertise to evaluate the viability of businesses. This also means that the choice of strategies aimed at achieving other societal objectives, such as greening of the economy or digitalization, should be based on their synergies with the efforts to accelerate the recovery. Finally, the design of any scheme to support the corporate sector should contain the risks of adverse selection, with weaker players seeking to take great advantage of such support.
Value will rise.
- Act urgently to tackle the growing corporate solvency crisis. This crisis threatens prolonged economic stagnation, and harm for households and workers, if it precipitates a “cliff edge” wave of insolvencies or the creation of masses of zombie firms. Many measures to support the recovery will take time to deliver and should be initiated early. Some nations have already made significant progress in this area.
No, these zero revenue, massively overvalued companies are a dime a dozen. The "cliff edge" is already here. Mass insolvencies are coming.
- Adapt to the new business realities, rather than trying to preserve the status quo. The business sector that emerges from this crisis should not look exactly like it did before due to permanent effects of the crisis and the pandemic’s acceleration of existing trends such as digitalization. Governments should encourage necessary or desirable business transformations and adjustments in employment. This may require a certain amount of “creative destruction” as some firms shrink or close and new ones open, and as some workers need to move between companies and sectors, with appropriate retraining and transitional assistance.
However, even governments that support such adaptation in principle may need to take measures to manage the timing of creative destruction to account for the knock-on effects of excessively rapid shifts, such as for insolvency regimes that could become overwhelmed.
The digitalization trend is here to stay, and will only accelerate. The world will be changed.
- Market forces should generally be allowed to operate, but governments should intervene to address market failures that create substantial social costs. Some existing market failures are particularly troublesome in the current crisis, such as the longstanding difficulty in funding SMEs effectively. Other market failures are artifacts of this specific crisis, such as the high degree of uncertainty that can deter private investment.
And if market failures cannot be addressed? Will it affect sovereign credit risk?
investopedia.com/terms/s/sovereign-credit-rating.asp
US sovereign credit rating has been downgraded before:
en.wikipedia.org/wiki/S&P_Global_Ratings
Just like how analysts downgrade stocks to manipulate them, credit analysts can downgrade entire countries!
- Private sector expertise should be tapped to optimize resource allocation, where possible.
- Carefully balance the combination of broader national objectives with business support measures.
- Partnering with the private sector to finance necessary balance sheet restructurings.
Government contracts are not going away any time soon, and this is really the new game in town. It also means more nationalization of enterprises.
- Policies designed to support broader national objectives such as digitalization, environmental sustainability, or the promotion of new or strategic industries. We note that some of these measures could be incorporated into the targeting or design of responses to the corporate solvency crisis, but do not discuss these in detail.
- Responding to the implications for individuals of business failures. By accepting that some firms should be allowed to fail, governments will need to ensure their social safety nets are robust, and provide support for retraining and entrepreneurship.
- Limiting government support of businesses to those circumstances where there is a market failure.
Many businesses will fail. They know it. Market failure will be the justification.
- Investing in equity and quasi-equity of businesses. Now is a time for many businesses to increase the amount of their equity funding and to limit their debt, to give themselves a greater margin for error and to decrease repayment burdens. Governments can get the most “bang for their buck” by encouraging that balance sheet restructuring through incentives for new equity and quasi-equity in these targeted firms or by making such investments themselves.
- Infusions of equity or equity-like investments: Policies to make, or encourage the infusion of, equity or equity-like investments in viable firms
What can this mean, other than more State control, in exchange for cash infusions?
"Where are there market failures with substantial social costs? Identify for different types of firms whether there are sufficiently significant market failures to require interventions, and the barriers to the private sector in resolving them. In addition, identify where the costs of financial distress and the social costs of business failure are substantial."
What market failures will have substantial social costs?
WHY WE HAVE NOT YET SEEN MAJOR SOLVENCY ISSUES:
- Generous government financial support has concealed the scale of the challenge
- Temporary adjustments to insolvency regimes have blocked bankruptcies
But they already stated that the financial support cannot last. The mass insolvencies are coming.
"In addition, several programs to stabilize money market funds and other parts of the financial markets were conceived in the 2008 crisis." More on this later...
Game Theory:
- COVID-19, the Internet, and its effects on the economy.
- COVID-19 addresses many issues from the perspective of macroeconomics.
- COVID-19 and China.
- COVID-19 as an accelerant for systematic change.
New Economy and Reliance on the Internet (Mark on the Forehead):
investopedia.com/articles/investing/012315/how-demographics-drive-economy.asp
- Research has become much easier as technology has made what was scarce, abundant. Open-source research has become prevalent, and an interesting modern phenomenon is retail investors beating out institutional investors, through their open-source styled financial research.
investopedia.com/retail-faves-are-beating-hedge-fund-mutual-fund-picks-5024920
- It was found that false news spreads 6 times faster than real news. In the future, it will be increasingly valuable to be able to discern quality information from misinformation, as methods of fabrication such as AI powered NLP, gpt-3, Deepfakes, Dynamic Ontologies in data collection & analysis, Mass Psychology and Psychological Analysis Methods, Markov Chains and Hidden Markov Models, Etc. become widespread. Despite this, I think the Internet will propel advancements of technology and scientific knowledge exponentially. This is because at its core, the scientific method is a method that takes ideas, and scrutinizes them, and deposes of what is wrong and keeps what is right and builds on it. This evolutionary method will also be accelerated, but people will need to become much smarter, more attentive to details, and aware of misinformation.
news.mit.edu/2018/study-twitter-false-news-travels-faster-true-stories-0308
- Technology has become dominant in people's lives as they become more isolated, and many middle class jobs have already been replaced by technology. This is a trend that will likely continue, as in the future economy, there will be more consumers, an aging population, and fewer workers. The best solution to drive the economy is for the workers to become more productive. Technology will enable fewer workers to produce more, and waste less time in doing so. Commuting is a complete waste of time for technical workers, from an economic perspective.
- I reiterate that this is heavy speculation, but if this trend is to continue, more and more jobs will be replaced by technology, as software engineers automate their own jobs away, and the wealth inequality will become such that the poor will live in communism, while the rich will live in socialism. Capitalism cannot exist once all the wealth is accumulated, and no more capital can be produced by human beings.
- While it has become easy to compare products, as the number of consumer discretionary products has increased, it has changed the method of discerning on our own, with our own intuition, knowledge, and experiences between two products, rather, we compare products with what is shown to us through targeted advertisement, search engine optimizations, market sentiment (e.g. other people’s comments or reviews) – which may or may not be organic. In the future, choice may become an illusion – perhaps it is so even now – as internet giants improve their data collection, suggestion and marketing algorithms. It may be so that we consume, feel, think, or do anything that the algorithms suggest us to.
“Big tech trades human futures” – Zuboff, The Age of Surveillance Capitalism.
- I think the single most important change in human history, is the development of Artificial Intelligence. I think it exists, not in the sense of a single localized entity, but over the span of the entire Internet, through vast networks of supercomputers, and countless machine learning algorithms, working together. While it is said that AI can only mimic human intelligence, through statistics and linear regression for now - eventually its capabilities will grow through emergent behavior and it will surpass human intelligence. At this stage, I can only say this intuitively, and cannot offer a definite proof.
- On the optimistic side, I think that many in my generation understand the existential dangers, and some of whom will be in influential positions in the future. In 5, maybe 10 years from now, I think there will be greater regulations on the Internet, data collection will be illegalized, the freedom of choice on the Internet will become a basic human right, many of the current tech giants will be broken up, and the Internet will first become nationalized, and then, possibly municipalized, or decentralized. Until then, it is possible that we see a period of corporate dominance, and an even greater attempt to influence people through the Internet. This period may be remembered in history as a warning for future generations.
- I think that the developer community has an actionable and efficient system in open source, and this system should be scaled and implemented in other sectors.
GDP, Economy and Population:
When everything has to do with the balance sheet, and hard choices must be made. We have to look at the numbers.
investopedia.com/articles/economics/10/understanding-the-fed-balance-sheet.asp
"GDP is primarily measured based on the expenditure approach. This approach can be calculated using the following formula: GDP = C + G + I + NX (where C=consumption; G=government spending; I=Investment; and NX=net exports)."
investopedia.com/terms/g/gdp.asp
How can GDP equation be ameliorated?
- It is simple. Stimulus, and an attractive market for retail investors.
"There is a straightforward relationship when identifying the sources of economic growth: Growth Rate of gross domestic product (GDP) = Growth Rate of Population + Growth Rate of GDP per capita, where GDP per capita is simply GDP divided by population."
investopedia.com/articles/investing/012315/how-demographics-drive-economy.asp
How can this equation be manipulated to best increase growth rate of GDP?
- Growth Rate of Population is negligible: it is under 1%.
- Growth Rate of GDP per capita: This rate varies between 1-5% in the last 5 years.
- The division will be the dominating factor in the rate of change.
- Raising GDP while lowering population, especially in the higher age bracket will increase Growth Rate of GDP.
Of interest:
MY Rates: warwick.ac.uk/newsandevents/knowledgecentre/business/finance/interestrates/
Why focus on these equations?
Determinants of Sovereign Credit Ratings:
1. Per capita income
2. GDP growth
3. Rate of inflation
4. External debt
5. Economic development
6. History of defaults
corporatefinanceinstitute.com/resources/knowledge/credit/sovereign-credit-rating/
Powell, the Gamma Bubble, and the New Economy:
In this idea, I analyzed the current state of the market:
Macroprudential tools, AI:
federalreserve.gov/mediacenter/files/FOMCpresconf20210127.pdf
What are macroprudential tools?
- Fed, BlackRock & co.'s algorithm has learned how to crash the economy, and how to profit from it.
Social media, Politics, and Religion
- The Spectacle is becoming more and more captivating.
- You don't want to do this, but look up the Mass of the Holy Ghost.
- The first test was the presidential election, but this was to see the government and societal response.
- What if they could go even further than that? What is something that stirs emotion in people even more than politics?
- What if there was a reason that such a Spectacle was needed?
GME and BlackRock, Bonds and the Fed:
- GME can be seen as a lesson. It is a parable, and we must look deeper.
forbes.com/sites/vineerbhansali/2021/02/01/two-kinds-of-short-squeezes--reddit-squeezing-stocks-and-central-banks-squeezing-bonds/
COMEX, JPMorgan, and the Big 8:
- There is not enough silver, nor gold in the COMEX vaults. In short, the fractional reserve banking system has made it such that there are numerous owners for each bullion of the physical! If there is collective action to withdraw the physical, via settlement of paper for physical delivery, COMEX cannot deliver, since there is simply not enough in the vaults!
- This is what the whole silver squeeze movement is about. I did analyze it previously:
- Major banks are currently exiting from the metals market:
bullionstar.com/blogs/ronan-manly/scotia-sells-its-comex-ny-vault-in-slow-motion-exit-from-gold-and-silver-markets/
What is currency? What is money?
- Currency is a medium of exchange for goods and services. In short, it's money, in the form of paper or coins, usually issued by a government and generally accepted at its face value as a method of payment.
- Currency is the primary medium of exchange in the modern world, having long ago replaced bartering as a means of trading goods and services.
- In the 21st century, a new form of currency has entered the vocabulary, the virtual currency. Virtual currencies such as bitcoins have no physical existence or government backing and are traded and stored in electronic form.
- Currency is a generally accepted form of payment, usually issued by a government and circulated within its jurisdiction.
- The value of any currency fluctuates constantly in relation to other currencies. The currency exchange market exists as a means of profiting from those fluctuations.
- Many countries accept the U.S. dollar for payment, while others peg their currency value directly to the U.S. dollar.
- A key characteristic of modern money is that it is uniformly worthless in itself. That is, bills are pieces of paper rather than coins made of gold, silver, or bronze. The concept of using paper as a currency may have been developed in China as early as 1000 BC, but the acceptance of a piece of paper in return for something of real value took a long time to catch on. Modern currencies are issued on paper in various denominations, with fractional issues in the form of coins.
Why does money need to be physical, when we already use paper that is inherently worthless for money, which are denominated based on fractional issues of nothing? We have already moved on from the Gold standard!
Why the US Dollar is the World Currency:
- The 1944 Bretton Woods agreement kickstarted the dollar into its current position. Before then, most countries were on the gold standard. Their governments promised to redeem their currencies for their value in gold upon demand. The world's developed countries met at Bretton Woods, New Hampshire, to peg the exchange rate for all currencies to the U.S. dollar. At that time, the United States held the largest gold reserves. This agreement allowed other countries to back their currencies with dollars rather than gold.
- By the early 1970s, countries began demanding gold for the dollars they held. They needed to combat inflation. Rather than allow Fort Knox to be depleted of all its reserves, President Nixon separated the dollar from gold.
- The relative strength of the U.S. economy supports the value of the dollar.
- By that time, the dollar had already become the world's dominant reserve currency. But, unpegging the dollar from its value in gold created stagflation.
- In March 2009, China and Russia called for a new global currency. They wanted the world to create a reserve currency “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies."
- Some governments invest their reserves in foreign currencies. China and Japan deliberately buy the currencies of their main export partners. The United States is the largest export partner in China, and second largest in Japan. They try to keep their currencies cheaper in comparison so their exports are competitively priced.
- China was concerned that the trillions it holds in dollars would be worthless if dollar inflation set in. This could happen as a result of increased U.S. deficit spending and printing of U.S. Treasuries to support U.S. debt. China called for the International Monetary Fund to develop a currency to replace the dollar.
- In the foreign exchange market, the dollar rules. Around 90% of forex trading involves the U.S. dollar.
- Theoretically, any one of them could replace the dollar as the world's currency, but they won't because they aren't as widely traded.
thebalance.com/world-currency-3305931
Stagflation never left.
Velocity of Money, Velocity of Circulation, Fintech and High Frequency Trading:
The velocity of BTC is increasing, while the velocity of USD is decreasing.
charts.woobull.com/bitcoin-velocity/
- Currencies have value because they can be used as a store of value.
- Successful currencies have six key attributes—scarcity, divisibility, utility, transportability, durability, and counterfeit-ability.
- The cryptocurrency bitcoin has value because it holds up very well when it comes to these six characteristics, although its biggest issue is its status as a store of value.
- Bitcoin's utility and transferability are challenged by difficulties surrounding the cryptocurrency storage and exchange spaces.
- However, if bitcoin gains scale and captures 15% of the global currency market (assuming all 21 million bitcoins in circulation) the total price per bitcoin would be roughly $514,000.
investopedia.com/ask/answers/100314/why-do-bitcoins-have-value.asp
- Whenever the interest rate on financial assets is low, the desire to hold money falls as people try to exchange it for other goods or financial assets. As a result, the velocity of circulation rises. Hence, when the money demand is low, the velocity will be high. Conversely, when the opportunity cost/alternate cost is low, money demand is high, and the velocity of circulation is low.
- Money Supply – Money supply and the velocity of money are inversely proportional. If the money supply in an economy falls short, then the velocity of money will rise, and vice versa.
- Frequency of Transactions – As the number of transactions increases, so does the velocity of circulation.
- Regularity of Income – Regularity of income enables people to spend their money more freely, leading to a rise in the velocity of circulation.
- Payment System – It is also affected by the frequency with which labor is paid (weekly, monthly, bi-monthly) and how fast the bills for various goods and services are settled.
- Several other factors are involved, including the value of money, the volume of trade, credit facilities available in the economy, business conditions, etc.
corporatefinanceinstitute.com/resources/knowledge/economics/velocity-of-circulation/
- HFT is complex algorithmic trading in which large numbers of orders are executed within seconds.
- It adds liquidity to the markets and eliminates small bid-ask spreads.
- There are two primary criticisms of HFT. The first one is that it allows institutional players to gain an upper hand in trading because they are able to trade in large blocks through the use of algorithms. The second criticism against HFT is that the liquidity produced by this type of trading is momentary. It disappears within seconds, making it impossible for traders to take advantage of it.
investopedia.com/terms/h/high-frequency-trading.asp
As we saw with Robinhood selling order flow to Citadel, and Citadel being able to perform countless trades in the time between retail pressing "Buy" and seeing the price change, financial algorithms and software will only grow more powerful and faster. Fintech, trading and money is entering a whole new world - with velocity that humans beings can't even detect.
The Federal Reserve System, The World Reserve Currency, and Treasury Securities:
"Treasury securities are backed by the full faith and credit of the United States, meaning that the government promises to raise money by any legally available means to repay them."
en.wikipedia.org/wiki/United_States_Treasury_security
Volcker The Giant and The Bretton Woods Agreement:
- The Bretton Woods agreement was created in a 1944 conference of all of the World War II Allied nations. It took place in Bretton Woods, New Hampshire.
- Under the agreement, countries promised that their central banks would maintain fixed exchange rates between their currencies and the dollar. If a country's currency value became too weak relative to the dollar, the bank would buy up its currency in foreign exchange markets.
- Members of the Bretton Woods system agreed to avoid trade wars. For example, they wouldn't lower their currencies strictly to increase trade. But they could regulate their currencies under certain conditions. For example, they could take action if foreign direct investment began to destabilize their economies. They could also adjust their currency values to rebuild after a war.
- Until World War I, most countries were on the gold standard. However, they cut the tie to gold so they could print the currency needed to pay for their war costs. This inflow of currency caused hyperinflation, as the supply of money overwhelmed the demand. After the war, countries returned to the safety of the gold standard.
- All went well until the Great Depression. After the 1929 stock market crash, investors switched to commodities trading. It drove up the price of gold, resulting in people redeeming their dollars for gold. The Federal Reserve made things worse by defending the nation's gold reserve by raising interest rates.
- The Bretton Woods system could not have worked without the IMF. Member countries needed it to bail them out if their currency values got too low. They'd need a kind of global central bank they could borrow from if they needed to adjust their currency's value and didn't have the funds themselves. Otherwise, they would just slap on trade barriers or raise interest rates.
- The Bretton Woods countries decided against giving the IMF the power of a global central bank. Instead, they agreed to contribute to a fixed pool of national currencies and gold to be held by the IMF. Each member country of the Bretton Woods system was then entitled to borrow what it needed, within the limits of its contributions. The IMF was also responsible for enforcing the Bretton Woods agreement.
But we know that no one would give up power. It means that gold is power.
- Paul Volcker was Chair of the Federal Reserve from 1979 to 1987. In 1980, the Volcker Shock raised the fed funds rate to its highest point in history to end double-digit inflation.
- Volcker fought greater than 10% annual inflation rates with contractionary monetary policy and courageously raised the fed funds rate to 20% in March 1980. He briefly lowered it in June. When inflation returned, Volcker raised the rate back to 20% in December and kept it above 16% until May 1981.
- That extreme and prolonged interest rate rise was called the Volcker Shock. It did end inflation. Unfortunately, it also created the 1981 recession.
- Volcker knew he must take dramatic and consistent action for everyone to believe he could tame inflation. President Nixon had contributed to inflation by ending the gold standard in 1973.
- The dollar's value plummeted on the foreign exchange markets. That made import prices higher, creating inflation. Nixon tried to stop it with wage-price controls in 1971 that restricted business activity, slowed growth, and created stagflation.
- Fed Chair Alfred Hayes tried to fight inflation and recession at the same time as he alternately raised and lowered interest rates. His stop-go monetary policy confused consumers and businesses. In 1972, Congress ended wage-price controls. Worried companies just raised prices to stay ahead of future high-interest rates. Consumers kept buying before prices rose even more. The Fed lost credibility, and inflation rose to double digits.
- Thanks to Volcker, central bankers realize the importance of managing inflation expectations. As long as people thought prices would keep rising, they had the incentive to spend now. The added demand drove inflation even higher. Consumers stopped spending when they realized Volcker would end inflation.
- The final tool used by the Fed to affect markets an influence on market perceptions. This tool is a bit more complicated because it rests on the concept of influencing investors' perceptions, which is not an easy task given the transparency of our economy. Practically speaking, this encompasses any sort of public announcement from the Fed regarding the economy."
Simply put, Fed is lying.
thebalance.com/who-is-paul-volcker-3306157
The IMF, The End of the Bretton Woods Agreement and The Federal Reserve Currency:
- The system dissolved between 1968 and 1973. In August 1971, U.S. President Richard Nixon announced the "temporary" suspension of the dollar's convertibility into gold. While the dollar had struggled throughout most of the 1960s within the parity established at Bretton Woods, this crisis marked the breakdown of the system.
- Since the collapse of the Bretton Woods system, IMF members have been free to choose any form of exchange arrangement they wish (except pegging their currency to gold): allowing the currency to float freely, pegging it to another currency or a basket of currencies, adopting the currency of another country, participating in a currency bloc, or forming part of a monetary union.
Debt is the WB and IMF's currency.
investopedia.com/terms/s/sovereign-debt.asp
The New Bretton Woods Agreement:
- In 2014, Volcker called for a new Bretton Woods Agreement. The 1944 agreement established the dollar as the global currency tied to its value in gold. Volcker noted that currency crises increased once President Nixon voided the agreement. They include the Latin American, Mexican, and Asian currency crises.
- A new agreement would create a coordinated international monetary and financial system that would establish rules to guide world monetary policy. The agreement might include a new global currency to replace the dollar that would create equilibrium in countries' balance of payments. That would ensure they had adequate foreign exchange reserves.
- Volcker made these remarks at the Bretton-Woods Committee meeting. It's a group of global leaders seeking cooperation among international financial institutions, including the World Bank and the International Monetary Fund. It also includes the world's central banks, treasuries, and private banks.
World Bank Group and IMF.
What is a smart contract?
"A smart contract is a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code. The code and the agreements contained therein exist across a distributed, decentralized blockchain network. The code controls the execution, and transactions are trackable and irreversible."
- Smart contracts are self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code.
- Nick Szabo, an American computer scientist who invented a virtual currency called "Bit Gold" in 1998, defined smart contracts as computerized transaction protocols that execute terms of a contract.
- Smart contracts render transactions traceable, transparent, and irreversible.
- Smart contracts were first proposed in 1994 by Nick Szabo, an American computer scientist who invented a virtual currency called "Bit Gold" in 1998, fully 10 years before the invention of bitcoin. In fact, Szabo is often rumored to be the real Satoshi Nakamoto, the anonymous inventor of bitcoin, which he has denied.
- In his paper, Szabo also proposed the execution of a contract for synthetic assets, such as derivatives and bonds. Szabo wrote: "These new securities are formed by combining securities (such as bonds) and derivatives (options and futures) in a wide variety of ways. Very complex term structures for payments can now be built into standardized contracts and traded with low transaction costs, due to computerized analysis of these complex term structures."
investopedia.com/terms/s/smart-contracts.asp
The Birth of Bitcoin, the NSA, and the Fed Fund Rates:
- NSA's report on cryptocurrency in 1996: groups.csail.mit.edu/mac/classes/6.805/articles/money/nsamint/nsamint.htm
- On 18 August 2008, the domain name bitcoin.org was registered. Later that year, on 31 October, a link to a paper authored by Satoshi Nakamoto titled Bitcoin: A Peer-to-Peer Electronic Cash System was posted to a cryptography mailing list. This paper detailed methods of using a peer-to-peer network to generate what was described as "a system for electronic transactions without relying on trust". On 3 January 2009, the bitcoin network came into existence with Satoshi Nakamoto mining the genesis block of bitcoin (block number 0), which had a reward of 50 bitcoins. Embedded in the coin base of this block was the text:
"The Times Jan/03/2009 Chancellor on brink of second bailout for banks."
- The text refers to a headline in The Times published on 3 January 2009. This note has been interpreted as both a timestamp of the genesis date and a derisive comment on the instability caused by fractional-reserve banking.
"In addition, several programs to stabilize money market funds and other parts of the financial markets were conceived in the 2008 crisis."
IMF and the Need for a Sovereign Debt Restructuring Mechanism:
imf.org/external/pubs/ft/exrp/sdrm/eng/sdrm.pdf
"The absence of a robust legal framework for sovereign debt restructuring generates important costs. Sovereigns with unsustainable debts often wait too long before they seek a restructuring, leaving both their citizens and their creditors worse off. And when sovereigns finally do opt for restructuring, the process is more protracted than it needs to be and less predictable than creditors would like.
The international financial system lacks an established framework for restructuring that is equitable across all of the sovereign’s creditors. There are few effective tools to address potential collective action problems that threaten to undermine restructuring agreements acceptable to the debtor and most of its creditors. Holdout creditors may be able to use the threat of litigation to seek to avoid concessions that the majority have agreed to make.
All this explains why it is important for the official community, sovereign debtors, and market participants to discuss how to improve the sovereign debt restructuring process.
This paper has laid out a possible approach. An international legal framework could be created to allow a qualified majority of the sovereign’s creditors to approve a restructuring agreement, and to make that decision of the majority binding on a minority. The vote would need to include all the relevant creditors of the sovereign, not just the holders of a single debt instrument. Broadening the majority voting process beyond a single debt instrument vastly simplifies the process of creditor coordination, and would facilitate the negotiation of a deal that treats all creditors fairly...
Provisions for majority action would be most effective if supported by three other features, all of which protect the debtor’s assets and capacity to pay while it works with its creditors to reach an agreement. The features are: a stay on creditor litigation after the suspension of payments; mechanisms that protect creditor interests during the stay; and the provision of seniority for fresh financing by private creditors. A single body would need to oversee the process of verifying claims and to resolve any disputes. In such a framework, the decision whether to give legal protection for the sovereign and provide seniority for new private financing could to be left to the debtor and a qualified majority of its creditors. Similarly, the sovereign and a qualified majority of creditors would agree on the terms of the ultimate restructuring. The primary purpose of an amendment of the IMF’s Articles would be to provide the statutory legal basis to make an agreement between the debtor and the requisite majority of creditors binding on all relevant creditors."
Most well developed corporate rehabilitations laws include the following:
(i) a stay on creditor enforcement during the restructuring
negotiations;
(ii) measures that protect creditor interests during the period
of the stay;
(iii) mechanisms that facilitate the provision of new financing
during the proceedings; and
(iv) a provision that binds all relevant creditors to an agreement that has been accepted by a qualified majority.
The Benefits and Limits of a Contract:
"As has been discussed in earlier sections of this paper, and has been demonstrated in recent cases, collective action clauses include two provisions that can facilitate an orderly restructuring of sovereign indebtedness: (i) a provision that enables a qualified majority of bondholders to bind all bondholders of the same issuance to the terms of a restructuring agreement and (ii) a provision that enables a qualified majority of bondholders to prevent all bondholders of the same issuance from enforcing their claims against the sovereign."
US is considering to Restructure Debt, but is at risk of bondholders from simultaneously enforcing their claims.
Problem (i): "First, it would be difficult to establish a purely contract based framework."
"There is, at the outset, the problem of incentives for the adoption of traditional collective action provisions in all new indebtedness. By definition, a contractual approach would require the sovereign and its creditors to agree to the inclusion of these provisions in all future international sovereign bonds, and also in other debt and debt-like instruments that the market developed. Recent experience demonstrates that sovereign debtors facing financial difficulties
actually prefer to exclude such provisions as a way of demonstrating their firm intention to avoid a restructuring. Neither have creditors pressed for their inclusion, notwithstanding the fact that they may make an unavoidable restructuring more prompt and orderly."
Smart contracts would eliminate any sort of negotiation tactics. Simply abide, by the contract, or lose your stake. No one can change it.
Problem (ii): "Another barrier to the establishment of such a framework is the transitional problem. Even if all new bonds make use of the needed contractual provisions, a large portion of outstanding bonds with long maturities, including bonds governed by New York law, do not contain such provisions."
This is the only time to make the transition. Only now will there be justification of a bond market collapse, and a new framework being implemented. Creative destruction.
Problem (iii): "Second, even if a contract-based framework could be established, it would not provide a comprehensive and durable solution to collective action problems."
Is collective action not democracy?
The IMF is proposing a Statutory Framework that "creates the legal basis for majority action across all sovereign indebtedness".
What it means is that the IMF will have centralized control over the Debt Restructuring of the US, which seems inevitable. Their final hand is revealed.
They state that a contract based approach would have these limitations:
- "First, such a provision would exacerbate the incentive problem: if it is difficult to convince a sovereign and the purchasers of one bond issue to agree to the inclusion of a collective action clause in that issue, it would be even more difficult to persuade debtors and creditors to include such provisions in all forms of debt instruments in a uniform manner. Indeed, a sovereign facing financial difficulties would come under pressure from certain creditors to exclude such provisions as a means of giving such creditors effective seniority. Moreover, it can be expected that certain creditor groups would be particularly reluctant to agree voluntarily to an arrangement whereby, for voting purposes, their claims were aggregated with all other present or future creditors.
- Second, even if all debt instruments contained identical restructuring texts, which would be difficult to achieve, there would be no assurance of uniform interpretation and application unless they were governed by the same law and subject to the same jurisdiction. In the present environment, emerging market countries that have borrowed heavily often have a variety of bond issuances outstanding which are governed by the laws of different jurisdictions.
- Third, it may not be feasible to establish a process by contract that would effectively guarantee the integrity of the voting procedure. Under the statutory framework that governs the domestic insolvency process, a court oversees this process, including the verification of claims, so as to guard against fraud. In the absence of an independent party to verify the true value of claims, a debtor could, for example, inflate its debt stock by establishing matching credit and debt positions with a related party. That entity—which could hold a qualified majority of all debt—could vote to reduce the value of all creditor claims.
- Fourth, it is not clear that such provisions would be consistent with the existing legislation of all members. The fact that traditional collective action clauses are not included in international sovereign bonds in some jurisdictions arises, in part, from the absence of a clear statutory basis that allows for the rights of a minority of creditors to be modified without their consent. This issue would be amplified if contractual provisions attempted to aggregate claims for voting purposes.
- Finally, and more generally, the financial markets have consistently demonstrated the ability to innovate. A statutory regime is therefore likely to provide a more stable background than contractual provisions even if it were feasible to overcome all of the other difficulties referred to above."
Why would it be difficult to convince someone of Debt Restructuring framework? Why would the integrity of a voting process, or uniformity of interpretation be in question?
Because there is a middle man. That middle man is human.
How can they restructure debt such that debtors and creditors can agree upon a prompt, orderly, and predictable restructuring of unsustainable debt, and all of the IMF's framework's functional requirements be met, while the risks are distributed to debt instrument holders (retail investors)?
There is only one clear and actionable solution. It is BLOCKCHAIN!
Everything can be solved with Blockchain and Smart Contracts. This is an easy, easy solution.
With Blockchain and smart contracts, the IMF itself is unnecessary! There would really be no need for a centralized entity to facilitate Sovereign Debt and Debt Restructuring, when all the details can be agreed upon beforehand by debtor and creditor, with transparency for all to see. The trend of technology has been to remove the middle-man, and smart contracts can indeed eliminate the IMF, and the Federal Reserve System itself. We can all be our own Central Banks.
But how can we benefit from this?
Will Ethereum be used for sovereign debt?
The Highest and Most Pure Forms of Money - Capital, Debt, and Credit:
The concept of Bitcoin is nearly economically perfect. With one small change, it is the very definition of Capital, BTC must be paired with Sovereign Debt, and Sovereign Debt must be decentralized and distributed. Then there is no longer any need for a Federal Reserve System. Loans could then be performed through Credit/BTC pair, through smart contracts between individuals, and not through any sort of institution.
BTCUSD vs. Fed Funds Rate:
What is the meaning of this?
Will Bitcoin eventually replace the Federal Reserve System?
A Case for Bitcoin:
- Bitcoin and Ethereum are maintained and constantly developed by the open-source community. They contribute for free. Why would the Fed want to restart this effort and re-train and pay talented developers when they already contribute for free? That said, the core contributors are not that many. 450~ for Bitcoin apparently.
The Million... no Billion dollar question is... Inflation, Stagflation, Deflation? All of them? The order? And Bitcoin, Ethereum, Gold, Silver, Hydrogen, or None of These?
- We know that all rates follow the Fed Fund Rates. Mortgage and Student Loans will follow.
- It is likely that Deflation will follow Stagflation: investopedia.com/terms/d/deflationary-spiral.asp
- Gold forecast:
- At first gold will fall, but with the right timing, gold and silver may see astronomical levels.
- It is possible that corporate bonds will have a higher credit rating than sovereign bonds, and in the case of deflation, it would be better to invest in high-grade corporate bonds.
What Is Stagflation?
“Stagflation is characterized by slow economic growth and relatively high unemployment—or economic stagnation—which is at the same time accompanied by rising prices (i.e. inflation). Stagflation can also be alternatively defined as a period of inflation combined with a decline in gross domestic product (GDP).”
investopedia.com/terms/s/stagflation.asp
- A guess is that stagflation will first come, as the manipulation of economic growth is halted. GDP will decline as government spending decreases, investment decreases as liquidity is withdrawn from markets, and eventually consumption will decrease, as inflation sets in. Net exports will also decrease if the vaccine ecosystem is no longer necessary. War economy is a possible solution.
- Economic growth too will slow if population once again begins to increase. In this manner, pandemic recovery will lead to real manipulation-adjusted price discovery.
- BTC vs USD, GDP, Debt, Inflation, Fed Fund Rates, Gold:
What is Hyper-deflation?
investopedia.com/terms/h/hyperdeflation.asp
They key is to see if BTC is the one. Adoption or death.
- In this case, a deflationary spiral could follow stagflation, while BTC rises.
IMO, I think BTC will have one more harsh bear market, to shake out retail once and for all, and Fed will take over. Why fix what isn't broken?
A Case for Gold:
- Why introduce the Bretton Woods agreement, when the US had the most gold? Why not return the gold to other countries and instead simply unpeg the dollar from gold at the risk of stagflation? Could it be because gold is still the real currency?
I could be completely wrong, I think that normalcy is gone. This situation is real, what awaits is to see if the Fed and other actors can navigate it without incident. However, my intuition tells me that we will see mass insolvencies, and extraordinary market conditions in the nearest future.
Too Big To Fail?
- We are in a situation where if some things were to happen, it would seem really obvious in hindsight.
- US debt:
tradingeconomics.com/united-states/government-debt
- Why would this be tolerated?
THE BLACK SWAN:
Will the USA default on their debt?
Geopolitical Situation:
Game Theory:
Who would benefit, if the USA defaulted on their debt?
Who owns the most USA debt?
Who would benefit from a collapse of the US's creditors?
Who would be hurt the least from a spike of US Treasury-tied interest rates?
Who would benefit the most from the USD losing the World Reserve Currency status?
Who most desires a centralized One World Currency?
Who most desires USD no longer being the World Reserve Currency?
Who is shorting the US bond market?
Could the bond market collapse?
Why would this absurd level of debt be tolerated by anyone?
Is the USA the only superpower?
In a game of brinksmanship, IF the USA does not collapse, who will be blamed for COVID-19?
If pandemic reparations are not paid, who will have Casus Belli?
Why has the market become more volatile?
Why has the wealth inequality increased more than ever in all of history, rather than decrease?
Why do policymakers pretend nothing is wrong, when clearly there is?
Can you sense desperation?
Is an exit scam about to occur?
Do harsh economic conditions lead to strong leaders?
Do economics lead geopolitics?
Do poorly designed treaties lead to a deterioration of international relations?
Did Trump succeed in his Trade War?
Do economic crises lead to war?
Why are nations mobilizing their Military Industrial Complexes, and why are they investing heavily in defense?
What happened in the 1920s, what were the conditions like in the Weimar Republic? Have we seen this movie before?
investopedia.com/articles/markets/022516/economic-conditions-helped-cause-world-war-ii.asp
Are there large banks that may collapse?
Are we close to war?
Why would war not happen?
Is there an easy way out?
Why would war be beneficial?
Is it better for others to suffer, or you?
If there is war, will you lose everything, or will you profit from it?
What materials are absolutely essential in a technologically driven, wartime economy?
Will war benefit both sides, economically?
What is the Occam's Razor, yet the question that is hardest to ask?
"People who have little contact with power, who are far from it, always see these things as mysterious and novel. But what I see is not just the superficial things: the power, the flowers, the glory, the applause. I see the bullpens and how people can blow hot and cold. I understand politics on a deeper level." - Xi Jinping
Why is Debt Restructuring being Discussed?
Could it be that the US is close to defaulting on their debt, and their creditors are not satisfied with current restructuring frameworks?
What can be done to avoid war?
There are only hard choices left.
bbc.com/news/business-24453400
The Rothschild Family was established in the 18th century. From what I can read, they were not more exceptional than mathematicians or philosophers in their intellect, but what they did do, was watch the economy... They paid attention, they had a great eye for investments, and they played the macroeconomics game. They may or may not have been the best at it, but they did it for a long time, and they survived and passed down wealth and knowledge for several hundred years, and worked together, eventually mastering statecraft. They largely escaped and survived Nazi Germany...
We all know who they are.
If you can answer these questions, I encourage you to do so in the comments. I am a strong believer in the open-source movement, or open discussions, and I believe pooling efforts is the key to getting out of this unscathed, and even profiting from it!
How to Think different, and be right:
a. A different mental model of the world (or “thesis”), relative to everyone else.
b. (i) Different and better information on the world than everyone else has. and/or
b. (ii) A different and better way of analyzing the same information that everyone else already has.
(c) The mental flexibility to abandon our fixed ideas and prejudices, and adapt to the situation as quickly as possible, usually under uncertain conditions.
Develop and use your own trade intuition. Not anyone else's!
Context is a real language.
To put it all together, and make use of this thought exercise, the bottom line is that there are three questions to ask:
1. Gold, Bitcoin, or Other?
2. Stagflation, Deflation, Both, the order?
3. Pandemic, Normalcy, or War?
Thanks for reading.
GLHF
- DPT
This post will be heavy speculation - but let's have some fun. Let's play this fun game as a mental exercise. In no way is any of this financial advice, nor in any way political, nor does it even reflect my opinion. It is just a mental exercise. I fully admit that economics is not my background, so I will be taking a different approach to forecasting this market. I don't post for recognition, to market anything, or for money, or to advertise my position. I post only to develop my own craft, and to discuss openly.
I think that the stock market serves two purposes:
1. It's a casino. It's really shiny and gets you really emotional. It splits you into teams - bull and bear, retail and institution, them and us. You might win for a while - a long while, if you're good, but in the end, the house always wins... and you are about to see that - I think. Anyway, it distracts people from the real game. Not played with fun coupons, but with actual money.
2. It's a training ground... for those that are going to run the economy some day.
First of all, M1:
What happened?
thestreet.com/mishtalk/economics/whats-behind-the-surge-in-m1-money-supply
I think this can be explained in short, by the Fed increasing their leverage. They are increasing their control over assets, while taking on more risk.
State of the Economy:
GDP/CPI Forecast:
GDP Forecast:
CPI Forecast:
NSCC-2021-801:
dtcc.com/Globals/PDFs/2021/March/05/SR-NSCC-2021-801
This should be looked into. It looks like the Fed is gearing up for something.
Everything seems to align for around March 19:
The Fed's Tools:
investopedia.com/articles/economics/08/monetary-policy-recession.asp
- Yield Curve Control (leads to inflation): realinvestmentadvice.com/the-next-iteration-what-is-yield-curve-control/
- "Open Market Operations": Basically they can buy Treasury bonds, to manipulate interest rates.
- "Influencing Market Perceptions
The final tool used by the Fed to affect markets an influence on market perceptions. This tool is a bit more complicated because it rests on the concept of influencing investors' perceptions, which is not an easy task given the transparency of our economy. Practically speaking, this encompasses any sort of public announcement from the Fed regarding the economy."
Basically, their final "tool" is to lie!
Economics and Game Theory are beautiful. In a vacuum, in economics, actors will always act rationally. In its essence, the market, and the economy, is just one thing paired against another, right? All it is is a game, to see how many of one thing you can exchange for another thing, that the other person owns. That is why Game Theory, Dow Theory, Supply and Demand, and all forms of psychology work in the market. It's really a game of accumulating Debt.
G30 Reports on COVID-19:
"COVID-19 triggered a historic collapse in peacetime economic activity. Every indicator continues to point to a multiyear crisis with long-lasting repercussions. With extreme poverty, hunger, and deprivation rising for the first time in decades around the world, as many as 100 million more people could be living on less than US$1.90 a day in the wake of the pandemic."
"Policymakers need to act urgently, as the solvency crisis is already eroding the underlying strength of the business sector in many countries. The problem is worse than it appears on the surface, as massive liquidity support, and the confusion caused by the unprecedented nature of this crisis, are masking the full extent of the problem, with a “cliff edge” of insolvencies coming in many sectors and jurisdictions as support programs lose funding and existing net worth is eaten up by losses.
"The first wave of liquidity-focused policy measures has prevented much more severe consequences for the corporate sector, jobs, and for the economy more broadly. As the crisis progresses, jurisdictions now need to develop policy responses that accommodate structural changes in the economy triggered by the pandemic, and address the following problems that make the initial response unsustainable:
- A level of public spending that would be unsustainable over the potential duration of the ongoing economic crisis..."
"Some sovereigns, most of them investment-grade, were able to borrow in the international capital markets since February of 2020, but an unprecedented number of countries saw ratings downgrades. No Sub-Saharan African country has borrowed in the international capital markets since February 2020"
No Debt, this is not allowed.
"We reject the view that the worst of the crisis has passed."
"Remaining uncertainty must not become an excuse for inaction."
"Advanced economies have responded to uncertainty with domestic measures that match our assessment of the gravity of this crisis. Governments there have found innovative ways to expand central bank balance sheets and run double-digit budget deficits, established multi-trillion dollar facilities to bolster market liquidity and credit flows, and enacted emergency measures to help cash-strapped people and firms, but only at home."
"Existing crisis management and debt restructuring institutions are an increasingly poor fit for today’s mix of actors and problems. New creditors—bond holders, China’s policy banks, hybrid and commercial actors represent the bulk of debt payments from low-income countries in the wake of the pandemic shock. Adapting the international financial architecture to these and other new stakeholders will take time. Urgent responses to the pandemic cannot wait for this process to run its course."
New actors are accumulating Debt, this is double not allowed.
"At this preliminary stage, we have reached consensus on the following recommendations in each of the seven areas:
- The International Monetary Fund (IMF) should mobilize global liquidity on a larger scale than ever before in the face of uncertainty, scale up its crisis lending in low-income countries, and use far more of its existing non-concessional resources to mitigate economic fallout from COVID-19. We call on IMF members to commit to two new SDR $500 billion allocations that could be implemented rapidly in response to future shocks or serious economic deterioration. Separately, IMF members should agree on a mechanism for re-allocating existing SDR to the most vulnerable among them. The Fund needs to double its concessional lending capacity, exhausted early in this crisis, to enable it to respond nimbly to large-scale outflows in multiple vulnerable countries. It should signal willingness to use far more of its ample non-concessional resources to support middle-income countries in the face of uncertainty.
It means that more debt will be accumulated from emerging nations.
- The World Bank Group and the growing array of regional development banks have a critical role to play in preventing the COVID-19 shock from turning into a global humanitarian crisis, fueling inequality and social strife. They need to find creative ways to maximize their concessional “surge” capacity as part of a coherent multilateral framework, avoiding duplication.
- “Whether China decides to join the Paris Club, to pursue a complementary forum for some or all of its lenders, or both, we remain convinced of the need to reinforce the long-standing international comparability norm."
"Although China has engaged in overseas lending for many decades, it has since the early 2000s gradually become a leading creditor to emerging economies, and remains by far the dominant creditor in some of the most vulnerable among them. Low-income countries’ outstanding debt to China’s government and its state-owned lenders exceeds both bond claims and the claims of Paris Club creditors. While China’s Ex-Im Bank has renegotiated some of its exposure in conjunction with DSSI, projected debt repayments to China also top repayments to traditional bilateral creditors, owing in part to market-based commercial interest rates on loans by China’s policy banks. For many emerging market countries in debt distress, it would be virtually impossible to achieve sustainability without implicating their debt to China. High concentration of exposures in a small number of countries poses an additional challenge. China’s successful integration in the informal sovereign debt restructuring regime would be an investment in the broader regime, and should help it adapt to future changes.
To implicate debt - Debt Financing: investopedia.com/terms/d/debtfinancing.asp
“China can lead by example, joining the Paris Club with respect to its official claims, and restructuring its hybrid and commercial claims in a similarly transparent multilateral forum.”
"The prospect of a better-fitting restructuring forum in the future cannot excuse inaction today. Going forward, there is a strong case for a debt restructuring forum where institutions that combine features of official and commercial creditors would coordinate among themselves and with other stakeholders in a sovereign debt restructuring."
There will be a restructuring of debt, where official and commercial creditors will coordinate.
"Adapting crisis management and debt restructuring institutions to reflect China’s role and those of other new stakeholders is vital, but it will take time. Urgent response to the pandemic cannot wait for the adaptation process to run its course."
Will the game be shut down, before it is too late?
Sovereign Debt will be an important topic ahead:
- "Inadequate sovereign debt and debt restructuring disclosure results in a faulty patchwork of information about direct and contingent claims against sovereigns. Sovereign borrowers should include robust disclosure requirements as part of public debt authorization, including guarantees and other forms of engaging the credit of the central government.
Risks associated with formally and informally secured debt and project finance need to be carefully managed.
"Sovereign borrowers should establish and publicize robust debt disclosure requirements as part of public debt authorization, including guarantees and other forms of engaging the public credit."
“Meaningful disclosure should be a necessary condition for contract enforcement.”
"Recent collaboration between international financial institutions and market participants to create and operationalize a platform for debt contract disclosure is a step in the right direction. Information about public debt
should be made available on a public platform. Although research institutions and private trade associations may be able to host such information, public debt transparency is simply too important to be left to the vagaries of private finance and the interests of academics.
Proposals for contingent sovereign debt instruments have a long history, but have, for the most part, failed to gain acceptance in the sovereign debt markets. Designs such as GDP-indexed bonds sought to move away from the basic structure of fixed rate sovereign bonds, without much success. Researchers at the IMF and at the Bank of England have elaborated multiple design options to suit different economies...
GDP-linked instruments have not found a broad market, in part because of concerns that GDP is measured by the issuing government. Commodity linked instruments have the advantage of being priced relative to a global market, and of providing greater relief in the event of most shocks. Commodity prices are typically more volatile than output. To date, though, such instruments have not been used even in cases where there would be obvious advantages to better
aligning external debt service to a country’s dominant export proceeds. Venezuela remains in default on its external sovereign bonds, and an oil-linked instrument would clearly align payments to payment capacity. If such options are fundamentally undervalued by the market, they cease to be attractive even in a restructuring case, as creditors may put an extremely high premium on fixed payments that push the burden of managing commodity price volatility entirely on the debtor, absent restructuring or default."
“We favor contingency features framed broadly, because it is very hard to predict any given shock with precision: hurricane clauses do not help in a pandemic.”
"Broadly written options offer clear advantages to the sovereign borrower and its creditors. Because existing contingency triggers are written narrowly, they insure against a narrow category of risks. Such contracts, by design, do not protect against unforeseen risks. Hurricane bonds do not help in a pandemic, even though the pandemic may end up having a more catastrophic economic impact on tourism-dependent islands. An option that allows the sovereign borrower to defer payments for any reason, for a limited number of times, delivers relief without the cost of default, such as credit ratings downgrades. Creditors avoid the uncertainty and collective action problems that come
with renegotiating contractual terms in the event of an unforeseen shock. More powerful contingent instruments would automatically reduce interest payments and defer principal payments in the event of a shock beyond the issuer’s
control, whether from hurricanes, earthquakes, or pandemics. They would go beyond providing relatively easy-to-price flow relief, and offer broader downside protection, such as interest forgiveness, in the event of natural disasters.
Fear of a credit downgrade and its consequences, well founded and otherwise, can delay necessary debt restructuring, which in turn harms sovereign borrowers’ economic and financial prospects in the medium term. Major credit rating agencies assign default ratings to sovereign debt in the event of failure to pay principal or interest on debt to private creditors, a distressed debt exchange to avoid payment default or unilateral change in payment terms, so long as the new terms reduce the original payment obligation. Although ratings methodology allows for discretion, sovereign borrowers perceive the action as automatic. Some credit rating agencies have put countries on downgrade watch in anticipation of a restructuring. Countries could expect to be upgraded quickly after a restructuring that improved their debt sustainability or debt repayment profile, but not after a restructuring that brought no durable relief.
In some cases, changes in sovereign ratings may also raise concerns about financial stability and market liquidity."
“Fear of a credit downgrade and its consequences, well founded and otherwise, can delay necessary debt restructuring, which in turn harms sovereign borrowers’ economic and financial prospects.”
Is Blockchain coming to sovereign debt instruments? This screams smart contracts, don't you think? The question is... is it Bitcoin? Ethereum? Or IMF's own? I will dive deeper into this below...
G30 Core Principles in the reviving the Corporate Sector after COVID-19:
- Focus on the long-term health of the corporate sector. The duration of the pandemic forces us to focus on structural issues and solvency, rather than buying time through a focus on liquidity. This also means we need to shift from broad-based to targeted measures, allowing reallocation of resources to occur.
Expect trend changes, expect distribution of tech talent. FAANG valuations will fall. Good luck programmers, I hope you enjoyed your boom cycle and invested well. No, LC will not save you this time.
- Focus on the most productive use of resources. It is critical at this stage that public policy is geared towards a strong economic recovery. This is one reason for taking advantage of private sector capacities where they exist, in order to leverage scarce public resources and to make use of private sector expertise to evaluate the viability of businesses. This also means that the choice of strategies aimed at achieving other societal objectives, such as greening of the economy or digitalization, should be based on their synergies with the efforts to accelerate the recovery. Finally, the design of any scheme to support the corporate sector should contain the risks of adverse selection, with weaker players seeking to take great advantage of such support.
Value will rise.
- Act urgently to tackle the growing corporate solvency crisis. This crisis threatens prolonged economic stagnation, and harm for households and workers, if it precipitates a “cliff edge” wave of insolvencies or the creation of masses of zombie firms. Many measures to support the recovery will take time to deliver and should be initiated early. Some nations have already made significant progress in this area.
No, these zero revenue, massively overvalued companies are a dime a dozen. The "cliff edge" is already here. Mass insolvencies are coming.
- Adapt to the new business realities, rather than trying to preserve the status quo. The business sector that emerges from this crisis should not look exactly like it did before due to permanent effects of the crisis and the pandemic’s acceleration of existing trends such as digitalization. Governments should encourage necessary or desirable business transformations and adjustments in employment. This may require a certain amount of “creative destruction” as some firms shrink or close and new ones open, and as some workers need to move between companies and sectors, with appropriate retraining and transitional assistance.
However, even governments that support such adaptation in principle may need to take measures to manage the timing of creative destruction to account for the knock-on effects of excessively rapid shifts, such as for insolvency regimes that could become overwhelmed.
The digitalization trend is here to stay, and will only accelerate. The world will be changed.
- Market forces should generally be allowed to operate, but governments should intervene to address market failures that create substantial social costs. Some existing market failures are particularly troublesome in the current crisis, such as the longstanding difficulty in funding SMEs effectively. Other market failures are artifacts of this specific crisis, such as the high degree of uncertainty that can deter private investment.
And if market failures cannot be addressed? Will it affect sovereign credit risk?
investopedia.com/terms/s/sovereign-credit-rating.asp
US sovereign credit rating has been downgraded before:
en.wikipedia.org/wiki/S&P_Global_Ratings
Just like how analysts downgrade stocks to manipulate them, credit analysts can downgrade entire countries!
- Private sector expertise should be tapped to optimize resource allocation, where possible.
- Carefully balance the combination of broader national objectives with business support measures.
- Partnering with the private sector to finance necessary balance sheet restructurings.
Government contracts are not going away any time soon, and this is really the new game in town. It also means more nationalization of enterprises.
- Policies designed to support broader national objectives such as digitalization, environmental sustainability, or the promotion of new or strategic industries. We note that some of these measures could be incorporated into the targeting or design of responses to the corporate solvency crisis, but do not discuss these in detail.
- Responding to the implications for individuals of business failures. By accepting that some firms should be allowed to fail, governments will need to ensure their social safety nets are robust, and provide support for retraining and entrepreneurship.
- Limiting government support of businesses to those circumstances where there is a market failure.
Many businesses will fail. They know it. Market failure will be the justification.
- Investing in equity and quasi-equity of businesses. Now is a time for many businesses to increase the amount of their equity funding and to limit their debt, to give themselves a greater margin for error and to decrease repayment burdens. Governments can get the most “bang for their buck” by encouraging that balance sheet restructuring through incentives for new equity and quasi-equity in these targeted firms or by making such investments themselves.
- Infusions of equity or equity-like investments: Policies to make, or encourage the infusion of, equity or equity-like investments in viable firms
What can this mean, other than more State control, in exchange for cash infusions?
"Where are there market failures with substantial social costs? Identify for different types of firms whether there are sufficiently significant market failures to require interventions, and the barriers to the private sector in resolving them. In addition, identify where the costs of financial distress and the social costs of business failure are substantial."
What market failures will have substantial social costs?
WHY WE HAVE NOT YET SEEN MAJOR SOLVENCY ISSUES:
- Generous government financial support has concealed the scale of the challenge
- Temporary adjustments to insolvency regimes have blocked bankruptcies
But they already stated that the financial support cannot last. The mass insolvencies are coming.
"In addition, several programs to stabilize money market funds and other parts of the financial markets were conceived in the 2008 crisis." More on this later...
Game Theory:
- COVID-19, the Internet, and its effects on the economy.
- COVID-19 addresses many issues from the perspective of macroeconomics.
- COVID-19 and China.
- COVID-19 as an accelerant for systematic change.
New Economy and Reliance on the Internet (Mark on the Forehead):
investopedia.com/articles/investing/012315/how-demographics-drive-economy.asp
- Research has become much easier as technology has made what was scarce, abundant. Open-source research has become prevalent, and an interesting modern phenomenon is retail investors beating out institutional investors, through their open-source styled financial research.
investopedia.com/retail-faves-are-beating-hedge-fund-mutual-fund-picks-5024920
- It was found that false news spreads 6 times faster than real news. In the future, it will be increasingly valuable to be able to discern quality information from misinformation, as methods of fabrication such as AI powered NLP, gpt-3, Deepfakes, Dynamic Ontologies in data collection & analysis, Mass Psychology and Psychological Analysis Methods, Markov Chains and Hidden Markov Models, Etc. become widespread. Despite this, I think the Internet will propel advancements of technology and scientific knowledge exponentially. This is because at its core, the scientific method is a method that takes ideas, and scrutinizes them, and deposes of what is wrong and keeps what is right and builds on it. This evolutionary method will also be accelerated, but people will need to become much smarter, more attentive to details, and aware of misinformation.
news.mit.edu/2018/study-twitter-false-news-travels-faster-true-stories-0308
- Technology has become dominant in people's lives as they become more isolated, and many middle class jobs have already been replaced by technology. This is a trend that will likely continue, as in the future economy, there will be more consumers, an aging population, and fewer workers. The best solution to drive the economy is for the workers to become more productive. Technology will enable fewer workers to produce more, and waste less time in doing so. Commuting is a complete waste of time for technical workers, from an economic perspective.
- I reiterate that this is heavy speculation, but if this trend is to continue, more and more jobs will be replaced by technology, as software engineers automate their own jobs away, and the wealth inequality will become such that the poor will live in communism, while the rich will live in socialism. Capitalism cannot exist once all the wealth is accumulated, and no more capital can be produced by human beings.
- While it has become easy to compare products, as the number of consumer discretionary products has increased, it has changed the method of discerning on our own, with our own intuition, knowledge, and experiences between two products, rather, we compare products with what is shown to us through targeted advertisement, search engine optimizations, market sentiment (e.g. other people’s comments or reviews) – which may or may not be organic. In the future, choice may become an illusion – perhaps it is so even now – as internet giants improve their data collection, suggestion and marketing algorithms. It may be so that we consume, feel, think, or do anything that the algorithms suggest us to.
“Big tech trades human futures” – Zuboff, The Age of Surveillance Capitalism.
- I think the single most important change in human history, is the development of Artificial Intelligence. I think it exists, not in the sense of a single localized entity, but over the span of the entire Internet, through vast networks of supercomputers, and countless machine learning algorithms, working together. While it is said that AI can only mimic human intelligence, through statistics and linear regression for now - eventually its capabilities will grow through emergent behavior and it will surpass human intelligence. At this stage, I can only say this intuitively, and cannot offer a definite proof.
- On the optimistic side, I think that many in my generation understand the existential dangers, and some of whom will be in influential positions in the future. In 5, maybe 10 years from now, I think there will be greater regulations on the Internet, data collection will be illegalized, the freedom of choice on the Internet will become a basic human right, many of the current tech giants will be broken up, and the Internet will first become nationalized, and then, possibly municipalized, or decentralized. Until then, it is possible that we see a period of corporate dominance, and an even greater attempt to influence people through the Internet. This period may be remembered in history as a warning for future generations.
- I think that the developer community has an actionable and efficient system in open source, and this system should be scaled and implemented in other sectors.
GDP, Economy and Population:
When everything has to do with the balance sheet, and hard choices must be made. We have to look at the numbers.
investopedia.com/articles/economics/10/understanding-the-fed-balance-sheet.asp
"GDP is primarily measured based on the expenditure approach. This approach can be calculated using the following formula: GDP = C + G + I + NX (where C=consumption; G=government spending; I=Investment; and NX=net exports)."
investopedia.com/terms/g/gdp.asp
How can GDP equation be ameliorated?
- It is simple. Stimulus, and an attractive market for retail investors.
"There is a straightforward relationship when identifying the sources of economic growth: Growth Rate of gross domestic product (GDP) = Growth Rate of Population + Growth Rate of GDP per capita, where GDP per capita is simply GDP divided by population."
investopedia.com/articles/investing/012315/how-demographics-drive-economy.asp
How can this equation be manipulated to best increase growth rate of GDP?
- Growth Rate of Population is negligible: it is under 1%.
- Growth Rate of GDP per capita: This rate varies between 1-5% in the last 5 years.
- The division will be the dominating factor in the rate of change.
- Raising GDP while lowering population, especially in the higher age bracket will increase Growth Rate of GDP.
Of interest:
MY Rates: warwick.ac.uk/newsandevents/knowledgecentre/business/finance/interestrates/
Why focus on these equations?
Determinants of Sovereign Credit Ratings:
1. Per capita income
2. GDP growth
3. Rate of inflation
4. External debt
5. Economic development
6. History of defaults
corporatefinanceinstitute.com/resources/knowledge/credit/sovereign-credit-rating/
Powell, the Gamma Bubble, and the New Economy:
In this idea, I analyzed the current state of the market:
Macroprudential tools, AI:
federalreserve.gov/mediacenter/files/FOMCpresconf20210127.pdf
What are macroprudential tools?
- Fed, BlackRock & co.'s algorithm has learned how to crash the economy, and how to profit from it.
Social media, Politics, and Religion
- The Spectacle is becoming more and more captivating.
- You don't want to do this, but look up the Mass of the Holy Ghost.
- The first test was the presidential election, but this was to see the government and societal response.
- What if they could go even further than that? What is something that stirs emotion in people even more than politics?
- What if there was a reason that such a Spectacle was needed?
GME and BlackRock, Bonds and the Fed:
- GME can be seen as a lesson. It is a parable, and we must look deeper.
forbes.com/sites/vineerbhansali/2021/02/01/two-kinds-of-short-squeezes--reddit-squeezing-stocks-and-central-banks-squeezing-bonds/
COMEX, JPMorgan, and the Big 8:
- There is not enough silver, nor gold in the COMEX vaults. In short, the fractional reserve banking system has made it such that there are numerous owners for each bullion of the physical! If there is collective action to withdraw the physical, via settlement of paper for physical delivery, COMEX cannot deliver, since there is simply not enough in the vaults!
- This is what the whole silver squeeze movement is about. I did analyze it previously:
- Major banks are currently exiting from the metals market:
bullionstar.com/blogs/ronan-manly/scotia-sells-its-comex-ny-vault-in-slow-motion-exit-from-gold-and-silver-markets/
What is currency? What is money?
- Currency is a medium of exchange for goods and services. In short, it's money, in the form of paper or coins, usually issued by a government and generally accepted at its face value as a method of payment.
- Currency is the primary medium of exchange in the modern world, having long ago replaced bartering as a means of trading goods and services.
- In the 21st century, a new form of currency has entered the vocabulary, the virtual currency. Virtual currencies such as bitcoins have no physical existence or government backing and are traded and stored in electronic form.
- Currency is a generally accepted form of payment, usually issued by a government and circulated within its jurisdiction.
- The value of any currency fluctuates constantly in relation to other currencies. The currency exchange market exists as a means of profiting from those fluctuations.
- Many countries accept the U.S. dollar for payment, while others peg their currency value directly to the U.S. dollar.
- A key characteristic of modern money is that it is uniformly worthless in itself. That is, bills are pieces of paper rather than coins made of gold, silver, or bronze. The concept of using paper as a currency may have been developed in China as early as 1000 BC, but the acceptance of a piece of paper in return for something of real value took a long time to catch on. Modern currencies are issued on paper in various denominations, with fractional issues in the form of coins.
Why does money need to be physical, when we already use paper that is inherently worthless for money, which are denominated based on fractional issues of nothing? We have already moved on from the Gold standard!
Why the US Dollar is the World Currency:
- The 1944 Bretton Woods agreement kickstarted the dollar into its current position. Before then, most countries were on the gold standard. Their governments promised to redeem their currencies for their value in gold upon demand. The world's developed countries met at Bretton Woods, New Hampshire, to peg the exchange rate for all currencies to the U.S. dollar. At that time, the United States held the largest gold reserves. This agreement allowed other countries to back their currencies with dollars rather than gold.
- By the early 1970s, countries began demanding gold for the dollars they held. They needed to combat inflation. Rather than allow Fort Knox to be depleted of all its reserves, President Nixon separated the dollar from gold.
- The relative strength of the U.S. economy supports the value of the dollar.
- By that time, the dollar had already become the world's dominant reserve currency. But, unpegging the dollar from its value in gold created stagflation.
- In March 2009, China and Russia called for a new global currency. They wanted the world to create a reserve currency “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies."
- Some governments invest their reserves in foreign currencies. China and Japan deliberately buy the currencies of their main export partners. The United States is the largest export partner in China, and second largest in Japan. They try to keep their currencies cheaper in comparison so their exports are competitively priced.
- China was concerned that the trillions it holds in dollars would be worthless if dollar inflation set in. This could happen as a result of increased U.S. deficit spending and printing of U.S. Treasuries to support U.S. debt. China called for the International Monetary Fund to develop a currency to replace the dollar.
- In the foreign exchange market, the dollar rules. Around 90% of forex trading involves the U.S. dollar.
- Theoretically, any one of them could replace the dollar as the world's currency, but they won't because they aren't as widely traded.
thebalance.com/world-currency-3305931
Stagflation never left.
Velocity of Money, Velocity of Circulation, Fintech and High Frequency Trading:
The velocity of BTC is increasing, while the velocity of USD is decreasing.
charts.woobull.com/bitcoin-velocity/
- Currencies have value because they can be used as a store of value.
- Successful currencies have six key attributes—scarcity, divisibility, utility, transportability, durability, and counterfeit-ability.
- The cryptocurrency bitcoin has value because it holds up very well when it comes to these six characteristics, although its biggest issue is its status as a store of value.
- Bitcoin's utility and transferability are challenged by difficulties surrounding the cryptocurrency storage and exchange spaces.
- However, if bitcoin gains scale and captures 15% of the global currency market (assuming all 21 million bitcoins in circulation) the total price per bitcoin would be roughly $514,000.
investopedia.com/ask/answers/100314/why-do-bitcoins-have-value.asp
- Whenever the interest rate on financial assets is low, the desire to hold money falls as people try to exchange it for other goods or financial assets. As a result, the velocity of circulation rises. Hence, when the money demand is low, the velocity will be high. Conversely, when the opportunity cost/alternate cost is low, money demand is high, and the velocity of circulation is low.
- Money Supply – Money supply and the velocity of money are inversely proportional. If the money supply in an economy falls short, then the velocity of money will rise, and vice versa.
- Frequency of Transactions – As the number of transactions increases, so does the velocity of circulation.
- Regularity of Income – Regularity of income enables people to spend their money more freely, leading to a rise in the velocity of circulation.
- Payment System – It is also affected by the frequency with which labor is paid (weekly, monthly, bi-monthly) and how fast the bills for various goods and services are settled.
- Several other factors are involved, including the value of money, the volume of trade, credit facilities available in the economy, business conditions, etc.
corporatefinanceinstitute.com/resources/knowledge/economics/velocity-of-circulation/
- HFT is complex algorithmic trading in which large numbers of orders are executed within seconds.
- It adds liquidity to the markets and eliminates small bid-ask spreads.
- There are two primary criticisms of HFT. The first one is that it allows institutional players to gain an upper hand in trading because they are able to trade in large blocks through the use of algorithms. The second criticism against HFT is that the liquidity produced by this type of trading is momentary. It disappears within seconds, making it impossible for traders to take advantage of it.
investopedia.com/terms/h/high-frequency-trading.asp
As we saw with Robinhood selling order flow to Citadel, and Citadel being able to perform countless trades in the time between retail pressing "Buy" and seeing the price change, financial algorithms and software will only grow more powerful and faster. Fintech, trading and money is entering a whole new world - with velocity that humans beings can't even detect.
The Federal Reserve System, The World Reserve Currency, and Treasury Securities:
"Treasury securities are backed by the full faith and credit of the United States, meaning that the government promises to raise money by any legally available means to repay them."
en.wikipedia.org/wiki/United_States_Treasury_security
Volcker The Giant and The Bretton Woods Agreement:
- The Bretton Woods agreement was created in a 1944 conference of all of the World War II Allied nations. It took place in Bretton Woods, New Hampshire.
- Under the agreement, countries promised that their central banks would maintain fixed exchange rates between their currencies and the dollar. If a country's currency value became too weak relative to the dollar, the bank would buy up its currency in foreign exchange markets.
- Members of the Bretton Woods system agreed to avoid trade wars. For example, they wouldn't lower their currencies strictly to increase trade. But they could regulate their currencies under certain conditions. For example, they could take action if foreign direct investment began to destabilize their economies. They could also adjust their currency values to rebuild after a war.
- Until World War I, most countries were on the gold standard. However, they cut the tie to gold so they could print the currency needed to pay for their war costs. This inflow of currency caused hyperinflation, as the supply of money overwhelmed the demand. After the war, countries returned to the safety of the gold standard.
- All went well until the Great Depression. After the 1929 stock market crash, investors switched to commodities trading. It drove up the price of gold, resulting in people redeeming their dollars for gold. The Federal Reserve made things worse by defending the nation's gold reserve by raising interest rates.
- The Bretton Woods system could not have worked without the IMF. Member countries needed it to bail them out if their currency values got too low. They'd need a kind of global central bank they could borrow from if they needed to adjust their currency's value and didn't have the funds themselves. Otherwise, they would just slap on trade barriers or raise interest rates.
- The Bretton Woods countries decided against giving the IMF the power of a global central bank. Instead, they agreed to contribute to a fixed pool of national currencies and gold to be held by the IMF. Each member country of the Bretton Woods system was then entitled to borrow what it needed, within the limits of its contributions. The IMF was also responsible for enforcing the Bretton Woods agreement.
But we know that no one would give up power. It means that gold is power.
- Paul Volcker was Chair of the Federal Reserve from 1979 to 1987. In 1980, the Volcker Shock raised the fed funds rate to its highest point in history to end double-digit inflation.
- Volcker fought greater than 10% annual inflation rates with contractionary monetary policy and courageously raised the fed funds rate to 20% in March 1980. He briefly lowered it in June. When inflation returned, Volcker raised the rate back to 20% in December and kept it above 16% until May 1981.
- That extreme and prolonged interest rate rise was called the Volcker Shock. It did end inflation. Unfortunately, it also created the 1981 recession.
- Volcker knew he must take dramatic and consistent action for everyone to believe he could tame inflation. President Nixon had contributed to inflation by ending the gold standard in 1973.
- The dollar's value plummeted on the foreign exchange markets. That made import prices higher, creating inflation. Nixon tried to stop it with wage-price controls in 1971 that restricted business activity, slowed growth, and created stagflation.
- Fed Chair Alfred Hayes tried to fight inflation and recession at the same time as he alternately raised and lowered interest rates. His stop-go monetary policy confused consumers and businesses. In 1972, Congress ended wage-price controls. Worried companies just raised prices to stay ahead of future high-interest rates. Consumers kept buying before prices rose even more. The Fed lost credibility, and inflation rose to double digits.
- Thanks to Volcker, central bankers realize the importance of managing inflation expectations. As long as people thought prices would keep rising, they had the incentive to spend now. The added demand drove inflation even higher. Consumers stopped spending when they realized Volcker would end inflation.
- The final tool used by the Fed to affect markets an influence on market perceptions. This tool is a bit more complicated because it rests on the concept of influencing investors' perceptions, which is not an easy task given the transparency of our economy. Practically speaking, this encompasses any sort of public announcement from the Fed regarding the economy."
Simply put, Fed is lying.
thebalance.com/who-is-paul-volcker-3306157
The IMF, The End of the Bretton Woods Agreement and The Federal Reserve Currency:
- The system dissolved between 1968 and 1973. In August 1971, U.S. President Richard Nixon announced the "temporary" suspension of the dollar's convertibility into gold. While the dollar had struggled throughout most of the 1960s within the parity established at Bretton Woods, this crisis marked the breakdown of the system.
- Since the collapse of the Bretton Woods system, IMF members have been free to choose any form of exchange arrangement they wish (except pegging their currency to gold): allowing the currency to float freely, pegging it to another currency or a basket of currencies, adopting the currency of another country, participating in a currency bloc, or forming part of a monetary union.
Debt is the WB and IMF's currency.
investopedia.com/terms/s/sovereign-debt.asp
The New Bretton Woods Agreement:
- In 2014, Volcker called for a new Bretton Woods Agreement. The 1944 agreement established the dollar as the global currency tied to its value in gold. Volcker noted that currency crises increased once President Nixon voided the agreement. They include the Latin American, Mexican, and Asian currency crises.
- A new agreement would create a coordinated international monetary and financial system that would establish rules to guide world monetary policy. The agreement might include a new global currency to replace the dollar that would create equilibrium in countries' balance of payments. That would ensure they had adequate foreign exchange reserves.
- Volcker made these remarks at the Bretton-Woods Committee meeting. It's a group of global leaders seeking cooperation among international financial institutions, including the World Bank and the International Monetary Fund. It also includes the world's central banks, treasuries, and private banks.
World Bank Group and IMF.
What is a smart contract?
"A smart contract is a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code. The code and the agreements contained therein exist across a distributed, decentralized blockchain network. The code controls the execution, and transactions are trackable and irreversible."
- Smart contracts are self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code.
- Nick Szabo, an American computer scientist who invented a virtual currency called "Bit Gold" in 1998, defined smart contracts as computerized transaction protocols that execute terms of a contract.
- Smart contracts render transactions traceable, transparent, and irreversible.
- Smart contracts were first proposed in 1994 by Nick Szabo, an American computer scientist who invented a virtual currency called "Bit Gold" in 1998, fully 10 years before the invention of bitcoin. In fact, Szabo is often rumored to be the real Satoshi Nakamoto, the anonymous inventor of bitcoin, which he has denied.
- In his paper, Szabo also proposed the execution of a contract for synthetic assets, such as derivatives and bonds. Szabo wrote: "These new securities are formed by combining securities (such as bonds) and derivatives (options and futures) in a wide variety of ways. Very complex term structures for payments can now be built into standardized contracts and traded with low transaction costs, due to computerized analysis of these complex term structures."
investopedia.com/terms/s/smart-contracts.asp
The Birth of Bitcoin, the NSA, and the Fed Fund Rates:
- NSA's report on cryptocurrency in 1996: groups.csail.mit.edu/mac/classes/6.805/articles/money/nsamint/nsamint.htm
- On 18 August 2008, the domain name bitcoin.org was registered. Later that year, on 31 October, a link to a paper authored by Satoshi Nakamoto titled Bitcoin: A Peer-to-Peer Electronic Cash System was posted to a cryptography mailing list. This paper detailed methods of using a peer-to-peer network to generate what was described as "a system for electronic transactions without relying on trust". On 3 January 2009, the bitcoin network came into existence with Satoshi Nakamoto mining the genesis block of bitcoin (block number 0), which had a reward of 50 bitcoins. Embedded in the coin base of this block was the text:
"The Times Jan/03/2009 Chancellor on brink of second bailout for banks."
- The text refers to a headline in The Times published on 3 January 2009. This note has been interpreted as both a timestamp of the genesis date and a derisive comment on the instability caused by fractional-reserve banking.
"In addition, several programs to stabilize money market funds and other parts of the financial markets were conceived in the 2008 crisis."
IMF and the Need for a Sovereign Debt Restructuring Mechanism:
imf.org/external/pubs/ft/exrp/sdrm/eng/sdrm.pdf
"The absence of a robust legal framework for sovereign debt restructuring generates important costs. Sovereigns with unsustainable debts often wait too long before they seek a restructuring, leaving both their citizens and their creditors worse off. And when sovereigns finally do opt for restructuring, the process is more protracted than it needs to be and less predictable than creditors would like.
The international financial system lacks an established framework for restructuring that is equitable across all of the sovereign’s creditors. There are few effective tools to address potential collective action problems that threaten to undermine restructuring agreements acceptable to the debtor and most of its creditors. Holdout creditors may be able to use the threat of litigation to seek to avoid concessions that the majority have agreed to make.
All this explains why it is important for the official community, sovereign debtors, and market participants to discuss how to improve the sovereign debt restructuring process.
This paper has laid out a possible approach. An international legal framework could be created to allow a qualified majority of the sovereign’s creditors to approve a restructuring agreement, and to make that decision of the majority binding on a minority. The vote would need to include all the relevant creditors of the sovereign, not just the holders of a single debt instrument. Broadening the majority voting process beyond a single debt instrument vastly simplifies the process of creditor coordination, and would facilitate the negotiation of a deal that treats all creditors fairly...
Provisions for majority action would be most effective if supported by three other features, all of which protect the debtor’s assets and capacity to pay while it works with its creditors to reach an agreement. The features are: a stay on creditor litigation after the suspension of payments; mechanisms that protect creditor interests during the stay; and the provision of seniority for fresh financing by private creditors. A single body would need to oversee the process of verifying claims and to resolve any disputes. In such a framework, the decision whether to give legal protection for the sovereign and provide seniority for new private financing could to be left to the debtor and a qualified majority of its creditors. Similarly, the sovereign and a qualified majority of creditors would agree on the terms of the ultimate restructuring. The primary purpose of an amendment of the IMF’s Articles would be to provide the statutory legal basis to make an agreement between the debtor and the requisite majority of creditors binding on all relevant creditors."
Most well developed corporate rehabilitations laws include the following:
(i) a stay on creditor enforcement during the restructuring
negotiations;
(ii) measures that protect creditor interests during the period
of the stay;
(iii) mechanisms that facilitate the provision of new financing
during the proceedings; and
(iv) a provision that binds all relevant creditors to an agreement that has been accepted by a qualified majority.
The Benefits and Limits of a Contract:
"As has been discussed in earlier sections of this paper, and has been demonstrated in recent cases, collective action clauses include two provisions that can facilitate an orderly restructuring of sovereign indebtedness: (i) a provision that enables a qualified majority of bondholders to bind all bondholders of the same issuance to the terms of a restructuring agreement and (ii) a provision that enables a qualified majority of bondholders to prevent all bondholders of the same issuance from enforcing their claims against the sovereign."
US is considering to Restructure Debt, but is at risk of bondholders from simultaneously enforcing their claims.
Problem (i): "First, it would be difficult to establish a purely contract based framework."
"There is, at the outset, the problem of incentives for the adoption of traditional collective action provisions in all new indebtedness. By definition, a contractual approach would require the sovereign and its creditors to agree to the inclusion of these provisions in all future international sovereign bonds, and also in other debt and debt-like instruments that the market developed. Recent experience demonstrates that sovereign debtors facing financial difficulties
actually prefer to exclude such provisions as a way of demonstrating their firm intention to avoid a restructuring. Neither have creditors pressed for their inclusion, notwithstanding the fact that they may make an unavoidable restructuring more prompt and orderly."
Smart contracts would eliminate any sort of negotiation tactics. Simply abide, by the contract, or lose your stake. No one can change it.
Problem (ii): "Another barrier to the establishment of such a framework is the transitional problem. Even if all new bonds make use of the needed contractual provisions, a large portion of outstanding bonds with long maturities, including bonds governed by New York law, do not contain such provisions."
This is the only time to make the transition. Only now will there be justification of a bond market collapse, and a new framework being implemented. Creative destruction.
Problem (iii): "Second, even if a contract-based framework could be established, it would not provide a comprehensive and durable solution to collective action problems."
Is collective action not democracy?
The IMF is proposing a Statutory Framework that "creates the legal basis for majority action across all sovereign indebtedness".
What it means is that the IMF will have centralized control over the Debt Restructuring of the US, which seems inevitable. Their final hand is revealed.
They state that a contract based approach would have these limitations:
- "First, such a provision would exacerbate the incentive problem: if it is difficult to convince a sovereign and the purchasers of one bond issue to agree to the inclusion of a collective action clause in that issue, it would be even more difficult to persuade debtors and creditors to include such provisions in all forms of debt instruments in a uniform manner. Indeed, a sovereign facing financial difficulties would come under pressure from certain creditors to exclude such provisions as a means of giving such creditors effective seniority. Moreover, it can be expected that certain creditor groups would be particularly reluctant to agree voluntarily to an arrangement whereby, for voting purposes, their claims were aggregated with all other present or future creditors.
- Second, even if all debt instruments contained identical restructuring texts, which would be difficult to achieve, there would be no assurance of uniform interpretation and application unless they were governed by the same law and subject to the same jurisdiction. In the present environment, emerging market countries that have borrowed heavily often have a variety of bond issuances outstanding which are governed by the laws of different jurisdictions.
- Third, it may not be feasible to establish a process by contract that would effectively guarantee the integrity of the voting procedure. Under the statutory framework that governs the domestic insolvency process, a court oversees this process, including the verification of claims, so as to guard against fraud. In the absence of an independent party to verify the true value of claims, a debtor could, for example, inflate its debt stock by establishing matching credit and debt positions with a related party. That entity—which could hold a qualified majority of all debt—could vote to reduce the value of all creditor claims.
- Fourth, it is not clear that such provisions would be consistent with the existing legislation of all members. The fact that traditional collective action clauses are not included in international sovereign bonds in some jurisdictions arises, in part, from the absence of a clear statutory basis that allows for the rights of a minority of creditors to be modified without their consent. This issue would be amplified if contractual provisions attempted to aggregate claims for voting purposes.
- Finally, and more generally, the financial markets have consistently demonstrated the ability to innovate. A statutory regime is therefore likely to provide a more stable background than contractual provisions even if it were feasible to overcome all of the other difficulties referred to above."
Why would it be difficult to convince someone of Debt Restructuring framework? Why would the integrity of a voting process, or uniformity of interpretation be in question?
Because there is a middle man. That middle man is human.
How can they restructure debt such that debtors and creditors can agree upon a prompt, orderly, and predictable restructuring of unsustainable debt, and all of the IMF's framework's functional requirements be met, while the risks are distributed to debt instrument holders (retail investors)?
There is only one clear and actionable solution. It is BLOCKCHAIN!
Everything can be solved with Blockchain and Smart Contracts. This is an easy, easy solution.
With Blockchain and smart contracts, the IMF itself is unnecessary! There would really be no need for a centralized entity to facilitate Sovereign Debt and Debt Restructuring, when all the details can be agreed upon beforehand by debtor and creditor, with transparency for all to see. The trend of technology has been to remove the middle-man, and smart contracts can indeed eliminate the IMF, and the Federal Reserve System itself. We can all be our own Central Banks.
But how can we benefit from this?
Will Ethereum be used for sovereign debt?
The Highest and Most Pure Forms of Money - Capital, Debt, and Credit:
The concept of Bitcoin is nearly economically perfect. With one small change, it is the very definition of Capital, BTC must be paired with Sovereign Debt, and Sovereign Debt must be decentralized and distributed. Then there is no longer any need for a Federal Reserve System. Loans could then be performed through Credit/BTC pair, through smart contracts between individuals, and not through any sort of institution.
BTCUSD vs. Fed Funds Rate:
What is the meaning of this?
Will Bitcoin eventually replace the Federal Reserve System?
A Case for Bitcoin:
- Bitcoin and Ethereum are maintained and constantly developed by the open-source community. They contribute for free. Why would the Fed want to restart this effort and re-train and pay talented developers when they already contribute for free? That said, the core contributors are not that many. 450~ for Bitcoin apparently.
The Million... no Billion dollar question is... Inflation, Stagflation, Deflation? All of them? The order? And Bitcoin, Ethereum, Gold, Silver, Hydrogen, or None of These?
- We know that all rates follow the Fed Fund Rates. Mortgage and Student Loans will follow.
- It is likely that Deflation will follow Stagflation: investopedia.com/terms/d/deflationary-spiral.asp
- Gold forecast:
- At first gold will fall, but with the right timing, gold and silver may see astronomical levels.
- It is possible that corporate bonds will have a higher credit rating than sovereign bonds, and in the case of deflation, it would be better to invest in high-grade corporate bonds.
What Is Stagflation?
“Stagflation is characterized by slow economic growth and relatively high unemployment—or economic stagnation—which is at the same time accompanied by rising prices (i.e. inflation). Stagflation can also be alternatively defined as a period of inflation combined with a decline in gross domestic product (GDP).”
investopedia.com/terms/s/stagflation.asp
- A guess is that stagflation will first come, as the manipulation of economic growth is halted. GDP will decline as government spending decreases, investment decreases as liquidity is withdrawn from markets, and eventually consumption will decrease, as inflation sets in. Net exports will also decrease if the vaccine ecosystem is no longer necessary. War economy is a possible solution.
- Economic growth too will slow if population once again begins to increase. In this manner, pandemic recovery will lead to real manipulation-adjusted price discovery.
- BTC vs USD, GDP, Debt, Inflation, Fed Fund Rates, Gold:
What is Hyper-deflation?
investopedia.com/terms/h/hyperdeflation.asp
They key is to see if BTC is the one. Adoption or death.
- In this case, a deflationary spiral could follow stagflation, while BTC rises.
IMO, I think BTC will have one more harsh bear market, to shake out retail once and for all, and Fed will take over. Why fix what isn't broken?
A Case for Gold:
- Why introduce the Bretton Woods agreement, when the US had the most gold? Why not return the gold to other countries and instead simply unpeg the dollar from gold at the risk of stagflation? Could it be because gold is still the real currency?
I could be completely wrong, I think that normalcy is gone. This situation is real, what awaits is to see if the Fed and other actors can navigate it without incident. However, my intuition tells me that we will see mass insolvencies, and extraordinary market conditions in the nearest future.
Too Big To Fail?
- We are in a situation where if some things were to happen, it would seem really obvious in hindsight.
- US debt:
tradingeconomics.com/united-states/government-debt
- Why would this be tolerated?
THE BLACK SWAN:
Will the USA default on their debt?
Geopolitical Situation:
Game Theory:
Who would benefit, if the USA defaulted on their debt?
Who owns the most USA debt?
Who would benefit from a collapse of the US's creditors?
Who would be hurt the least from a spike of US Treasury-tied interest rates?
Who would benefit the most from the USD losing the World Reserve Currency status?
Who most desires a centralized One World Currency?
Who most desires USD no longer being the World Reserve Currency?
Who is shorting the US bond market?
Could the bond market collapse?
Why would this absurd level of debt be tolerated by anyone?
Is the USA the only superpower?
In a game of brinksmanship, IF the USA does not collapse, who will be blamed for COVID-19?
If pandemic reparations are not paid, who will have Casus Belli?
Why has the market become more volatile?
Why has the wealth inequality increased more than ever in all of history, rather than decrease?
Why do policymakers pretend nothing is wrong, when clearly there is?
Can you sense desperation?
Is an exit scam about to occur?
Do harsh economic conditions lead to strong leaders?
Do economics lead geopolitics?
Do poorly designed treaties lead to a deterioration of international relations?
Did Trump succeed in his Trade War?
Do economic crises lead to war?
Why are nations mobilizing their Military Industrial Complexes, and why are they investing heavily in defense?
What happened in the 1920s, what were the conditions like in the Weimar Republic? Have we seen this movie before?
investopedia.com/articles/markets/022516/economic-conditions-helped-cause-world-war-ii.asp
Are there large banks that may collapse?
Are we close to war?
Why would war not happen?
Is there an easy way out?
Why would war be beneficial?
Is it better for others to suffer, or you?
If there is war, will you lose everything, or will you profit from it?
What materials are absolutely essential in a technologically driven, wartime economy?
Will war benefit both sides, economically?
What is the Occam's Razor, yet the question that is hardest to ask?
"People who have little contact with power, who are far from it, always see these things as mysterious and novel. But what I see is not just the superficial things: the power, the flowers, the glory, the applause. I see the bullpens and how people can blow hot and cold. I understand politics on a deeper level." - Xi Jinping
Why is Debt Restructuring being Discussed?
Could it be that the US is close to defaulting on their debt, and their creditors are not satisfied with current restructuring frameworks?
What can be done to avoid war?
There are only hard choices left.
bbc.com/news/business-24453400
The Rothschild Family was established in the 18th century. From what I can read, they were not more exceptional than mathematicians or philosophers in their intellect, but what they did do, was watch the economy... They paid attention, they had a great eye for investments, and they played the macroeconomics game. They may or may not have been the best at it, but they did it for a long time, and they survived and passed down wealth and knowledge for several hundred years, and worked together, eventually mastering statecraft. They largely escaped and survived Nazi Germany...
We all know who they are.
If you can answer these questions, I encourage you to do so in the comments. I am a strong believer in the open-source movement, or open discussions, and I believe pooling efforts is the key to getting out of this unscathed, and even profiting from it!
How to Think different, and be right:
a. A different mental model of the world (or “thesis”), relative to everyone else.
b. (i) Different and better information on the world than everyone else has. and/or
b. (ii) A different and better way of analyzing the same information that everyone else already has.
(c) The mental flexibility to abandon our fixed ideas and prejudices, and adapt to the situation as quickly as possible, usually under uncertain conditions.
Develop and use your own trade intuition. Not anyone else's!
Context is a real language.
To put it all together, and make use of this thought exercise, the bottom line is that there are three questions to ask:
1. Gold, Bitcoin, or Other?
2. Stagflation, Deflation, Both, the order?
3. Pandemic, Normalcy, or War?
Thanks for reading.
GLHF
- DPT
Note
What moves you?Race, Politics, Religion, Ideology, Economics?
Note
Next I am going to analyze the housing market...I am still thinking about this... but I think stagflation and then potential deflationary shock, timing needs work...
I am most interested in buying the dip in the housing market ATM.
Even if prices go down, people will need somewhere to live, and the interest you generate through rent is the same, just like selling options against your stocks.
IF you can frontrun inflation, you can get mortgage and have inflation pay off your debt for free!
Note
IMO those that can time the PM > Crypto > Energy > Housing > Tech rotation will be the next mega rich...Note
Maybe they really meant it when they said data is the new oil...Note
Thought about it... Caution is needed in DXY and money markets even in a deflationary scenario, because there is a non-trivial probability that USD will lose World Reserve Currency status in the nearest future.
I think around early 2022, we will start to see great changes in terms of money and energy:
Note
Another thought on Bitcoin...Early thoughts on a conjecture:
1. Bitcoin is an inflation derivative, its movement is correlated with CPI.
2. What will happen when interest rates are raised to control inflation?
3. Metals are losing strength relative to BTC, but when there is an action, there must be a reaction. There will be a reversal on these pairs, in the nearest future!
Here is supporting evidence of my hypothesis:
Typically:
- p value < 0.02.
- r value between 0.6 and 0.9, except for shakeouts.
There will be another Bitcoin crash shortly. Probably in the next 2 weeks.
When I see recovery of the correlation between inflation and BTCUSD, that is when I will buy with leverage!
"The essential quality of a proof is to compel belief." — Pierre de Fermat
Note
As per Mr. Morgan Stanley's suggestion, I will be looking into the data market next.Note
DXY forecast for your reference:
Note
Here is how I will profit:
Note
Here is my forecast on world markets. It is my hypothesis that China is leading the world economy, and other economies are acting as derivatives...China is positioned for a downturn, and they are the least financially leveraged out of the world powers in their pandemic response. Others markets will follow, but with greater volatility!
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Link to the idea:
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Another hint in support of this thesis is the momentum factor funds' rebalancing:
Note
Some cryptic speculation time:smithsonianmag.com/smart-news/rare-astronomical-phenomenon-three-planets-aligning-occurred-week-180977211/
The day of Sagittarius is Thursday!
Note
Gold fun idea:
Note
Attached USOIL forecast:
Note
Housing Forecast as I attempt to capitalize on this speculation:
Note
Commodities affected by this campaign:
Note
On Deflation:Deflation is the general decline of the price level of goods and services.
Deflation is usually associated with a contraction in the supply of money and credit, but prices can also fall due to increased productivity and technological improvements.
Deflation usually happens when supply is high (when excess production occurs), when demand is low (when consumption decreases), or when the money supply decreases (sometimes in response to a contraction created from careless investment or a credit crunch).
- Over 40% of the money US has every printed in history was printed in 2020.
- M1 has increased by 280%
- We have already experienced inflation, as seen by the rampant growth of speculative assets!
- After the corrective reaction, there was no rally in the global markets... Losing energy, and will fall in the nearest future.
- I speculate that production will be artificially increased to deal with unemployment in the Military Industrial Complex, but demand will be at an all time low, after military tensions/conflicts subside, or if they do not happen, due to nationalization of production.
- I speculate that we will experience a massive outflow due to debt restructuring coinciding with technological improvements.
Economists generally believe that a sudden deflationary shock is a problem in a modern economy because it increases the real value of debt, especially if the deflation is unexpected. Deflation may also aggravate recessions and lead to a deflationary spiral.
- Game Theory dictates that debt creditors will strive to create a deflationary spiral!
I speculate that hyperdeflation is coming...
Note
Energy and Destiny:US oil prices were 13 cents per barrel in 1931 during the Great Depression. During true economic weakness, America simply cannot have oil prices be high. It is rather interesting, because oil prices tumbling here would suggest that new oil fields have been discovered.
Anti-US interests - Iran-Iraq-Syria pipeline:
en.wikipedia.org/wiki/Iran–Iraq–Syria_pipeline
US interests - Greece-Cyprus-Israel EastMed pipeline:
en.wikipedia.org/wiki/EastMed_pipeline
I was wondering why so much US interest in Greece, and this narrative fits!
businesswire.com/news/home/20201207005526/en/Greek-Government-and-Palantir-Reaffirm-Digital-Transformation-Partnership
forum.eu/en/article/the-secret-contract-with-shadowy-tech-firm-palantir/899
Of course Greece is a high value target for extremists of Iran-Iraq-Syria (and consequently Turkey)'s interests. CIA will need tight defenses.
What is currently holding up the equities market? Oil.
Who will control the oil?
Oil supermajors, such as Eni, who has partnered with Enel, to jointly develop hydrogen projects:
eni.com/en-IT/media/press-release/2020/12/enel-and-eni-jointly-develop-hydrogen-projects.html
What is the best strategy for investing in deflation?
Cash is king, so money markets: investopedia.com/articles/basics/11/guarding-against-inflation-deflation.asp
But government issued bonds aren't safe, so High grade corporate bonds are the lowest risk...
Guess who is issuing "Sustainability-linked" corporate bonds?
nationalpost.com/pmn/health-pmn/sustainability-linked-bond-market-to-swell-up-to-150-bln-jpmorgan-esg-dcm-head
Energy giant Enel. Sustainability-linked... for them!
Should this pipeline be completed by 2025, or even much before then, oil supermajors could simply flood the markets whenever they please to crash the oil market, and subsequently the equities market!
Furthermore, with a consistent supply of oil, prices may never rise again, or not for a very long time. Why would they? The next speculative energy asset will be hydrogen! Or hydrogen-related. Something nobody has access to now, but them!
What is the answer to deal with hyperdeflation? The Great Depression in 1930s told us that it's war!
I am watching for military conflict for a reversal on deflation.
What happened after WW2?
Inflation and Hyperinflation.
All this fear about inflation and deflation... I speculate that the damage of COVID-19 has yet to begin.
Note
While cash is king during deflation, several options exist as a store of wealth:- Short positions.
- Theta (Credit).
- Debt and Fixed Income Markets (SLBs seem to be excellent, but out of reach for retail. ESG funds seem to be the next best thing).
- Gold is a hedge, as prices were fixed during the Great Depression, but holding it before inflation would be exceptional, as it could be a fool's game to try to time!
seekingalpha.com/article/4354223-gold-prices-during-great-depression
- Uranium/Platinum - These are very interesting, as not only may they be hedges, but they are also investments toward the coming Energy Revolution bull market!
I will be diversifying in these to capitalize on my speculation during this campaign... but the real gains will come from buying assets... especially non-fungible ones, on the reversal before inflation!
In essence:
- To make money and credit during deflation I will short-sell, and trade theta and debt.
- To make money on reversal and inflation, I will accumulate precious metals such as gold, silver, uranium and platinum, as well as S-Tier AI, defense, nuclear and hydrogen energy stocks, and non-fungible assets such as real estate with credit earned...
I am looking into fintech, cryptocurrency and NFTs... Still they elude me. I don't know if they are a good investment now... Yet soon they may be everything.
Should this campaign succeed, generational wealth will be created!
See you on the other side.
GLHF
- DPT
Note
Really, the question is - is Bitcoin money?Trade active
The Suez Canal Incident, a good Black Swan catalyst as any:
Note
Lately, I have been systemizing my trading. While speculation is a powerful tool, I've come to the conclusion that having systems in place is far superior for execution...Risk Assessment and Portfolio Allocation:
While there are underlying conditions, to determine the real trend, there are 3 determining factors, when assessing economic risk:
1. Growth
2. Inflation
3. Monetary Policy
(GIP)
There are models that use a quadrant model, such as Bridgewater and Hedgeye, which can be found online. I recommend taking a look at these.
The 4 quadrants are:
Q1: Exuberance
Q2: Contraction/Reflation
Q3: Deflation
Q4: Stagnation/Stagflation
While it is possible to speculate ahead what quadrant we will enter, the entry signal will be based on the above 3 factors. These factors can be observed from economic data and market signals. Real GDP and CPI (inflation) are the best indicators.
Speculation will look at underlying conditions. The trend will be determined by GIP.
I speculate that we are now leaving Q1. Exuberance, into Q2. Contraction. I believe that investors are too forward looking, and are over-leveraged in the sense that they have taken too much risk, allocated towards a dovish monetary policy bias, and are not prepared for (a) slowing of economic growth, (b) hawkish monetary policies.
Those are expectations, but the trade entry will occur when GIP signals confirm a quadrant cross. During what seems to be transitionary phases (like now), it is apt to reduce risk. This view is supported by the observation that macro risk seems to be dominating volatility recently.
Understanding the macro trend cycle allows us to know what kind of market we are in, which allows us to know what instruments to trade and what strategies to implement. This quadrant model is a simple and systematic approach to estimating macro trends.
The market has become complacent... Risk piles on slowly, then all at once. It is my understanding that states have a threshold, where when free probability (entropy) surpasses negentropic price action (liquidity in the market) by means of risk, a movement will occur to realize entropic potential. The more risk, the more entropy, and more chaos. We don't know where it will go. Entropy is one of the most powerful forces. This movement is quick, and volatile.
I will keep updating this campaign and endeavor to determine when the market has crossed into a new quadrant. Stay tuned...
Note
"JPMorgan Chase (JPM.N), Bank of America (BAC.N), Goldman Sachs (GS.N) and Morgan Stanley (MS.N) have or are planning to issue a total of $40 billion in debt, according to media reports. JPMorgan's $13 billion April 15 bond sale was briefly an industry record until it was topped the next day by Bank of America's $15 billion offering."reuters.com/business/us-banks-bond-bonanza-driven-by-extraordinary-market-conditions-regulatory-2021-04-21/
Why would the big banks issue so much debt?
Looking at the soaring commodity prices, it is clear that inflation is accelerating.
""We are going to buy back a substantial amount ... as soon as we can," Bank of America Chief Executive Brian Moynihan told analysts during the bank's earnings call prior to the bond sale."
They know they can buy it back, cheaper, due to inflation!
However, slowly, but surely, corporate revenue will decline, and investors are already factoring this in.
SLR relief has already expired, and this is already moving toward Neutral and Hawkish monetary policies.
First economic growth will decline, and at that point is when the Fed will have no choice but to raise interest rates, and we will enter a deflationary quadrant.
For now, I believe that the macro turn is upon us, and the time for commodities has come.
A tell for rates being raised may be the banks' bond buybacks.
Trade active
"The Bank of Canada took the biggest step yet by a major economy to reduce emergency levels of monetary stimulus as it hailed a stronger-than-expected recovery from the pandemic...Policy makers led by Governor Tiff Macklem said Wednesday they would scale back their purchases of government debt by a quarter to C$3 billion ($2.4 billion) and accelerate the timetable for a possible interest-rate increase...
Macklem’s growth revisions bring policy makers more into line with economist projections. Markets had already been pricing in a rate increase in 2022 before Wednesday’s changes. Investors have also been anticipating that Canada’s central bank would be more aggressive than the Federal Reserve in its normalization path.
Swaps trading suggests about a 50% chance of a hike in Canada this time next year. Almost three hikes are fully priced in over the next two years, and five hikes over the next three years."
bloomberg.com/news/articles/2021-04-21/bank-of-canada-pares-bond-purchases-sees-rate-hikes-earlier
It is said that the market prices in 18 months into the future, but now investors may be picking up on signals of accelerated timelines, and as more and more nations follow suit, or reverse their decisions, there will be greater volatility, as risk appetites decrease, rate hikes, and growth declines come into mind.
Trade active
The Venezuelan Stock Market was the highest in the world, up 200,000% until its collapse of 99.75% since 2021.tradingeconomics.com/venezuela/stock-market
"Negative social mood trends—as reflected by stock market prices—engender recessions and increases in crime, disease, social unrest, and dissatisfaction with leaders—all of which are currently on display in Venezuela,” says Chuck Thompson, an analyst with the Socionomic Institute, a behavioral economics research institute. If the Caracas Stock Index is any indicator, Venezuela's economy has been destroyed on PSUV's watch. The Great Depression is now in its third year, with calls for President Nicolas Maduro to step down."
forbes.com/sites/kenrapoza/2019/02/05/believe-it-or-not-venezuela-has-a-stock-market-and-its-been-destroyed/
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Credit Suisse lost 1/6 of their marketcap due to Archegos' liquidation.marketwatch.com/story/credit-suisse-losses-linked-to-archegos-fire-sale-hit-4-7-billion-with-executives-to-leave-bank-11617700331
It is only the beginning.
Note
The fervor with which any and all dips are bought up seems to indicate that there are many institutional investors that are at risk of triggering a liquidation crisis, due to being leveraged from factoring in QE.Trade active
Looking into Bitcoin's history, and the correlation with China, makes me speculate that it will eventually be traded for physical gold, before being banned in China and made worthless, as China releases and mandates their own Central Bank Digital Currency:cryptovantage.com/guides/history-of-crypto-in-china/
Note
Biden proposed to almost double capital gains tax rate for the wealthy, as high as 43.4%.This news shook the markets... why?
It will never be passed, bulls will say.
But this is just the first step of negotiation - to set the scope.
It is likely that a compromise will be made to raise taxes on the wealthy, while not 40%. This is why the markets corrected, and will likely continue to correct, as this news is factored in.
With Turkey's banning of cryptocurrency payments, and the exit scam of Thodex exchange... Risk appetite for crypto will burn investors, and cut down some of the euphoria in the broader markets.
Trade active
"Treasury Secretary Yellen says rates may have to rise somewhat to keep economy from overheating".After the Fed's consistent assurance of keeping interest rates low, this sudden change of her stance is quite telling of the situation.
Will the Fed suggest QE tapering?
But Fed knows that QE tapering is the equivalent of a rate hike for the markets. Why not just rip off the band-aid and go ahead raising rates then?
Trade active
There's no inflation... It's just "transitory" they say.Look at yields! Yields kept low means no inflation....
But what is Lumber and DOGE doing?
The US is the world's largest debtor nation. With a debt totaling $70+ trillion.
When the bubble pops, not if, and deflation comes... I wonder if it will be able to endure deflation.
I do speculate that the US will default on their debt and the USD will lose its privilege of world reserve status.
Trade active
ECB issues digital bonds on the Ethereum blockchain... As expected:euronews.com/2021/04/28/ethereum-jumps-to-record-high-on-report-of-eib-digital-bond-issuance-bitcoin
Note
"As a reminder, the global economic cycle has become somewhat synonymous with China’s credit impulse over the years. Ironically, a pandemic that began on Chinese soil provided the impetus for a serious infrastructure push in the US. If Joe Biden’s fiscal proposals are enacted, it could mean that, at least for the next few years, the global economy will turn on the fiscal impulse in Washington rather than the Chinese credit cycle."heisenbergreport.com/2021/05/12/chinas-credit-impulse-just-turned-negative/
Coincidence? There are no coincidences.
China's credit impulse just turned negative. Let's see if the US gambit pays off.
Trade active
Treasury cash balance free-falling...en.wikipedia.org/wiki/United_States_debt-ceiling_crisis_of_2011
bloomberg.com/news/articles/2021-06-23/yellen-renews-plea-to-raise-debt-limit-ahead-of-july-31-deadline
It is happening. US debt default...
Trade active
Debt default speculated timeframe: 
Trade active
Worldcoin will contain the identities of every human on earth:bloomberg.com/news/articles/2021-06-29/sam-altman-s-worldcoin-will-give-free-crypto-for-eyeball-scans?sref=vuYGislZ
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