Central Banks Will Let The Next Crash Happen

This report was originally published by Brandon Smith at Alt-Market.com

If you have been following the public commentary from central banks around the world the past few months, you know that there has been a considerable change in tone compared to the last several years.

For example, officials at the European Central Bank are hinting at a taper of stimulus measures by September of this year and some EU economists are expecting a rate hike by December. The Bank of England has already started its own rate hike program and has warned of more hikes to come in the near term. The Bank of Canada is continuing with interest rate hikes and signaled more to come over the course of this year. The Bank of Japan has been cutting bond purchases, launching rumors that governor Haruhiko Kuroda will oversee the long overdue taper of Japan’s seemingly endless stimulus measures, which have now amounted to an official balance sheet of around $5 trillion.

This global trend of “fiscal tightening” is yet another piece of evidence indicating that central banks are NOT governed independently from one another, but that they act in concert with each other based on the same marching orders. That said, none of the trend reversals in other central banks compares to the vast shift in policy direction shown by the Federal Reserve.

First came the taper of QE, which almost no one thought would happen. Then came the interest rate hikes, which most analysts both mainstream and alternative said were impossible, and now the Fed is also unwinding its balance sheet of around $4 trillion, and it is unwinding faster than anyone expected.

Now, mainstream economists will say a number of things on this issue — they will point out that many investors simply do not believe the Fed will follow through with this tightening program. They will also say that even if the Fed does continue cutting off the easy money to banks and corporations, there is no doubt that the central bank will intervene in markets once again if the effects are negative.  I would say that this is rather delusional thinking based on a dangerous assumption; the assumption that the Fed wants to save markets.

When mainstream economists argue that the Federal Reserve could conceivably keep low interest rates and stimulus going for decades if necessary, they often use the example of the Bank of Japan as some kind of qualifier. Of course, what they fail to mention is that yes, the BOJ has spent decades increasing its balance sheet which now sits at around $4.7 trillion (U.S.), but the Fed exploded its balance sheet to around $4.5 trillion in only eight years. That is to say, the Fed inflated a bubble as large if not larger than the Bank of Japan in less than half the time.

Frankly, the comparison is idiotic. And clearly according to their own admissions, the Fed is not going to be continuing stimulus measures anyway. People cling to this fantasy because they WANT to believe that the easy money party will never end. They are sorely mistaken.

I have been battling this delusion for quite some time. When I predicted that the Fed would taper QE, I received a predominantly negative reaction. The same thing occurred when I predicted the Fed would begin hiking interest rates. Now, I’m finding it rather difficult to break through the narrative that the Fed will intervene before the next crash takes place.

There is something so intoxicating about the notion that central banks will stop at nothing to prop up stock markets and bond markets. It generates an almost crazed cult-like fervor in the investment world; a psychedelic high that makes financial participants think they can fly. Of course, what has really happened is that these people have jumped off the roof of their overpriced condo; they think they are flying but they are really falling like a brick weighted down with stupidity.

Former Fed chairman Janet Yellen upon exiting her position stated:

“If stock prices or asset prices more generally were to fall, what would that mean for the economy as a whole?”

“I think our overall judgment is that, if there were to be a decline in asset valuations, it would not damage unduly the core of our financial system.”

Yellen also said when asked about high stock prices:

“Well, I don’t want to say too high. But I do want to say high. Price/earnings ratios are near the high end of their historical ranges…”

“Now, is that a bubble or is too high? And there it’s very hard to tell. But it is a source of some concern that asset valuations are so high.”

Since the middle of last year, the Fed has been calling the stock market overpriced and “vulnerable.” This rhetoric has only become bolder over the past several months. Dallas Fed president Robert Kaplan dismissed concerns over the affect rate hikes might have on markets and hinted at the potential for MORE than the three hikes planned for 2018. The Dow fell 666 points that same day.

New York Fed’s Bill Dudley shrugged off concerns over recent volatility, saying that an equity rout like the one that occurred in recent days “has virtually no consequence for the economic outlook.”

Jerome Powell, the new Fed chairman, has said while taking the chair position that he will continue with the current Fed policy of rate hikes and balance sheet reductions, and reiterated his support for more rate hikes this past week (while the mainstream media hyperfocused on his lip service promise to watch stock behavior closely). This indicates once again that it does not matter who is at the wheel of the Fed, its course has already been set, and the Chairman is simply there to act as the ship’s parrot mascot. The Fed is expected to raise interest rates yet again in March.

Now, all the evidence including the Fed’s surprise balance sheet reduction of $18 billion in January shows that at least for now, the central bank no longer cares about stocks and bonds.

In the meantime, 10 year Treasury Yields are spiking to the ever present danger level of 3% after a hotter than expected inflation report, and the dollar index is plunging. Showing us perhaps the first signs of a potential stagflationary crisis. Bottom line – markets are not long for this world if yields pass 3% and the falling dollar provides yet another excuse for faster interest rate hikes. More rate hikes means eventually cheap loans will become expensive loans.

My question is, if the Fed is not going to feed cheap fiat into banks and corporations to fuel stock buybacks, then WHO is going to buy equities now?

What about corporations? Nope, not going to happen. With corporate debt skyrocketing to levels far beyond that seen just before the 2008 crash, there is no chance that they will be able to sustain stock buybacks without aid from the Fed.

What about retail investors? I doubt it. Retail investors are the primary pillar boosting stocks at this stage in the game, but as we saw during the panic last week, it is unlikely that retail investors will maintain hands strong enough to refrain from selling at the first sign of trouble. They do tend to hastily jump back into markets to buy every dip because for many years this simplistic strategy has worked, but if the Fed continues to back away from stimulus and we seen a few more incidences like the 1,000+ point drops of recent days, investor conditioning will be broken, and blind faith will be replaced by doubt.

What about the American consumer? Will consumer profits boost companies and give them and they stock shares a solid foundation? I can barely write that question without laughing out loud. There was a time (it seems like so long ago) when company innovation and solid business strategies actually meant something when it comes to equities. Those days are over. Now, everything is based on the assumption of central bank intervention, and as I already noted, central banks are pulling the plug on life support.

Beyond that, U.S. consumers are now buried in historic levels of personal debt.

What about the Trump administration’s latest $1.5 trillion infrastructure plan? Will this act as a kind of indirect stimulus program picking up where the Fed left off? Unlikely.

Perhaps if such a plan had been implemented eight years ago in place of the useless bank bailouts and TARP, it might have made a difference. Though, a similar strategy did not work out very well for Herbert Hoover. In fact, many of the Hoover-era infrastructure projects were not paid off for decades after initial construction. Hoover was also a one term Republican president that oversaw the beginning of the Great Depression.

The system is too far into debt and too far gone for infrastructure spending to make any difference in the economic outcome. Add to that the fact that Treasury yields are liable to continue their upward trajectory due to the increased deficit spending, putting more pressure on stocks.

Interestingly, Trump’s budget director has even admitted that the plan will lead to even faster increases in interest rates, and Fed officials have been using this as a partial rationale for why they plan to continue cutting off stimulus measures.

I think anyone with any sense can see the narrative that is building here. The Federal Reserve is going to let markets crumble in 2018. They are going to continue raising interest rates and reducing their balance sheet faster than originally expected. They will not step in when equities crash. And, they don’t really need to. Trump continues to set himself up as the perfect scapegoat for a bubble implosion that had to happen eventually anyway. Now, the central banks can sufficiently avoid any blame.

***

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You can contact Brandon Smith at: brandon@alt-market.com

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One Bank Is Unsure If Any Humans Still Trade Stocks In Japan, Or Have All Moved To Bitcoin

While the wholesale disappearance of retail traders from stock markets is hardly a novel observation, it has taken on a whole new meaning in Japan, where the lack of carbon-based investors has prompted Deutsche Bank to ask if "Japan"s stocks are still traded at all by humans."

As Deutsche strategist Masao Muraki writes, since the US presidential election, Japanese stocks (in this case the TOPIX index) have been almost entirely defined by just three things: US stocks (S&P 500), the implied volatility (VIX), and USDJPY. This is shown in the model correlation chart below.

And while some observers think that foreigners are buying Japanese stocks on hopes for Abenomics following the Lower House election, this aspect is not apparent in the Figure above according to Deutsche. Instead, according to the German bank, it is the 10Yr US yields  that determine relative performance of Japanese and US financial stocks most directly. Additionally, interest rates, forex, and option prices (implied volatility) are defining absolute share prices for Japanese life insurers and banks, as shown in the charts below.

Furthermore, while financial institutions delivered some surprises in earnings announcements and shareholder returns and major developments took place in bank and insurers capital regulations in 2017 too, Deutsche notes that it "cannot find any indications of active change in allocations to life insurers and banks by investors due to these factors."

These observations prompt Deutsche to ask "a basic question", namely "whether the power of price decisions for Japanese stocks (particularly financial stocks) have shifted from people to algorithms or AI." Some additional thoughts:

Shift to passive fund management has accelerated, partially due to the impact of the Department of Labor’s fiduciary rules, and the trading share of active funds, which follow decisions led by human, is declining. With reduced influence, active funds appear to be focusing on sectors with drastic fundamentals changes (such as technology sector). In fact, more than 70% of inquiries from overseas equity investors to our insurance, securities, and other financial sectors team in December were about SBI, which indirectly owns cryptcurrencies. Reduction of active management costs due to MiFID2 might accelerate this activity.

And since Deutsche is clearly correct that increasingly more, if not the vast majority, of trading decisions and execution has shifted from humans to machines, the outcome is concerning, because as the German bank notes, "if the price formation based on model is prolonged, the gap between price and fundamentals will be wider. Thus, stock price correction may occur periodically."

Yet while Japanese equities may no longer be interesting to local humans, the same can not be said for bitcoin, where as the same DB strategist "discovered" two weeks ago, it was mostly "Mr. Watanabe" trading the world"s most popular cryptocurrency:

An 11 December Nikkei report stated that 40% of cryptocurrency trading in Oct-Nov was yen-denominated. Japanese traders have reportedly come to account for nearly half of cryptocurrency trading since China started to shut down cryptocurrency exchanges, and this is said to be widely known among industry insiders (various estimates exist). This report shows that Japanese men in their 30s and 40s who are engaged in leveraged FX trading (or who used to trade but have stopped) are driving the cryptocurrency market.

This in turn prompted us to wonder, tongue-in-cheek, if Bitcoin wasn"t a secretive ploy by the BOJ - which has had a far more permissive approach to bitcoin cryptocurrencies than its central bank peers - to boost Japanese animal spirits, which had been squashed by three decades of chronic deflation and disenchantment with rigged equities. Today, Deutsche Bank poses a similar question when it asks "Will Bitcoin ignite the “speculative spirit” of Japanese people?"

We will be closely monitoring the risk-taking stance of Japanese retail investors in 2018 in light of the management of ¥900trn of the ¥1,800trn as deposits in overall personal financial assets. Japanese retail investors eagerly purchased certain assets at prices with little support from fundamentals during the bubble period in the 1980s and the IT bubble period around 2000. Symbolic choices were NTT shares that listed in February 1987 for the former and Hikari Tsushin shares that listed in 1999 for the latter (Figure 1).

 

 

 

The emergence of “Bitcoin wealthy” might ignite the “speculative spirit” of Japanese people with strong follower aspirations.

Taken to its extreme, encouraging speculation in bitcoin - and in general any asset that is up over 15x YTD - would be a perfect way to rekindle not only animal spirits, but Japan"s reflationary impetus.  One can see why the BOJ could, if not would, be behind such a "wealth creation" mechanism.

Finally, as Deutsche accurately points out, "of course, speculation at prices with flimsy fundamentals support unleashes strong backlash once asset prices weaken. Overly leveraged trades, in particular, are a concern. Cryptocurrency prices plunged on 22 December, and we think this impacted retail investors using margin trades."

Well, not really, because the December 22 plunge is now long forgotten, and the real question one should ask is whether the Bank of Japan had anything to do with the sharp rebound in bitcoin which plunged as low as $10,500 last week before surging back to $16,000 earlier today...

Bubble Watch: The Fed KNOWS We"re in a 1999-Type Mania...

The Fed raised rates another 0.25% the week before last.

This marks the 5th rate hike since the Fed embarked on its policy tightening in December 2015 and the fourth rate hike in the last 12 months. The Fed’s latest statement also indicates it plans on raising rates three more times in 2018.

It is easy to gloss over the significance of this, but the Fed’s actions are indeed unusual; other major Central Banks (the Swiss National Bank, Bank of Japan, European Central Bank and Bank of England) are all currently running QE programs (the BoJ, ECB and BoE) or openly printing new money to buy stocks outright (the SNB).

What precisely is the Fed doing? Why the urge to tighten when other banks are all printing new money by the billions?

The following quotes from Fed offer us clues.

Fed Monetary Policy Report, June 2017:

“Forward price-to-earnings ratios for equities have increased to a level well above their median of the past three decades,

Fed minutes, July 2017:

"Since the April assessment, vulnerabilities associated with asset valuation pressures had edged up from notable to elevated, as asset prices remained high or climbed further, risk spreads narrowed, and expected and actual volatility remained muted in a range of financial markets."

Janet Yellen response to question from IMF Panel, October 2017:

Market valuations “are at high level in historical terms” when assessed on metrics akin to price-earnings ratios,

Fed Minutes, October 2017:

"In light of elevated asset valuations and low financial market volatility, several participants expressed concerns about a potential buildup of financial imbalances,"

Janet Yellen during Fed presser December 13th, 2017:

Stock valuations are at high end of historical levels.

I want to be clear on the significance of these statements.

The Fed’s primary role is to maintain financial stability. This means that the Fed will always downplay risks in its public statements. Indeed, former Fed Chair Ben Bernanke once stated that Fed policy is “98% talk, 2% action.”

With that in mind, the above quotes are astonishing in their clarity: the Fed is explicitly stating (in Fed terms) that the markets are in a bubble. And the Fed didn’t just do this once, the Fed has been warning about asset valuations/froth in the system for six months straight.

So just how “frothy” are things that the Fed is being so explicit?

Try “1999-levels” frothy.

Perhaps the best means of measuring frothiness in stocks is the Price to Sales (P/S) multiple. Most investors prefer to use Price to Earnings (P/E), but I am wary of that method because earnings can easily be fudged via gimmicks (different methods of depreciation, write-offs, reducing loan loss reserves, tax loopholes, etc.).

Sales, on the other hand, are very hard to fudge. Either money came in the door, or it didn’t. And if a company gets caught fudging its revenues, someone goes to jail.

With that in mind, consider that the S&P 500’s current P/S multiple has surpassed its former all time peak from 1999: a period that is now widely considered to be the single largest stock bubble in history.

Put simply, stocks are extraordinarily overvalued by a reliable measure.

H/T Bill King

However, there is one main difference between 1999 and today...

Namely, that the Fed has been INTENTIONALLY creating bubbles for nearly 20 years today... and it"s out of more senior asset classes to use!

Let me explain...

The late ‘90s was the Tech Bubble.

When that burst in the mid-‘00s, the Fed created a bubble in housing.

When that burst in ’08 the Fed created a bubble in US sovereign bonds or Treasuries.

And because these bonds are the bedrock of the US financial system, the “risk-free rate” of return against which ALL risk assets are valued, when the Fed did this it created a bubble in EVERYTHING (hence our coining of the term “The Everything Bubble” and our bestselling book by the same name).

On that note, we are putting together an Executive Summary outlining all of these issues as well as what’s to come when The Everything Bubble bursts.

It will be available exclusively to our clients. If you’d like to have a copy delivered to your inbox when it’s completed, you can join the wait-list here:

https://phoenixcapitalmarketing.com/TEB.html

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

Chinese Stocks Spooked By Apple iPhone X Forecast Cut, Nikkei Boosted By BOJ Hopes

With most global markets closed for Christmas, the only overnight action was in Asia, which saw Chinese equities fall with tech stocks and names linked to Apple the worst performers after a report that Apple cut forecast iPhone X sales forecasts, while property firms surged on speculation of coming consolidation. As a result, after opening higher, the Shanghai Composite Index closed 0.5% lower on the day, the blue-chip CSI 300 Index fell 0.3%, the Shenzhen Composite Index retreated 0.9%, while the ChiNext small-cap and tech Index dropped 1.3%. The PBOC"s refusal to conduct a reverse repo for the second day did not boost the market mood.

The biggest Asian losers were Apple suppliers after the Taipei-based Economic Daily News reported that Apple has cut its sales forecast for the iPhone X by 40% from 50 million in Q1 to only 30 million. The report also noted that Foxconn’s Zhengzhou plant stopped recruiting workers. Following the news, Apple supplier Lens Technology Co. dropped 8.4% to be among worst performers on the ChiNext measure; Shenzhen Sunway Communication Co. -2.2%, Luxshare Precision Industry and GoerTek both dropped at least 4%. As the table below shows, it was a sea of red for Apple suppliers.

#Apple suppliers are trading lower after #Taiwan media reported that Apple cut forecast of #iPhone X sales in Q1 2018 to 30mln units from prev 50mln units. pic.twitter.com/6TrhcHuHAP

— YUAN TALKS (@YuanTalks) December 25, 2017

Offsetting the drop in tech names was strength among property firms: Gemdale rose 6.3% as the best performer on CSI 300 measure after Citic Securities analysts said that the planned strict implementation of property curbs in 2018 would boost industry consolidation and benefit big companies. Unless, of course, it ends up crippling the business for everyone in which case today"s spike will promptly turn into a selloff.

Elsewhere in open Asian markets, Japan"s Nikkei erased early losses and scraped out gains on Monday as expectations that the Bank of Japan would buy more exchange-traded funds (ETFs) offset drops by financial stocks, Reuters reported. Movements in Japanese equities were confined to a narrow range with foreign investor presence lacking due to Monday"s closure of other major markets for Christmas; as a result, the Nikkei finished 0.16% higher at 22,939.18.

Of Tokyo"s 33 subsectors, 10 were in the red, led by securities T and banking after their U.S. financial peers lost steam on Friday following their recent strong performance. Denim clothing store operator Jeans Mate 7448.T soared 20.2 percent after reporting that December existing store sales increased 13.2 percent from a year earlier.  Furniture and interior goods seller Nitori Holdings 9843.T sank 6.4 percent after the company saw its operating profit for the nine months through to Nov. 20 rise a modest 0.3 percent to 70.4 billion yen ($621.58 million).

Cryptocurrency related shares slipped following recent wild swings in bitcoin. Internet provider GMO Internet which is engaged in the "mining" of bitcoin, fell 4.8%.  Remixpoint, an operator of virtual currency trading post services, dropped 4%.

In FX, it was a quiet session, with the only major mover once again out of China, where the yuan surged over 240bp to hit 6.5514 per USD at one point, the strongest since mid-September. Earlier in the day, the PBOC raised the yuan’s fixing by 138bp to 6.5683 per USD, the highest since Sept. 20. The dollar was little changed against other major currencies on Monday in holiday-thinned trading while the cost of swapping the yen for the dollar jumped as banks scrambled to raise dollars for the year-end period.

With most currency trading centers except for Tokyo shut on Monday for Christmas, trading volume was less than 20 percent of the average for major currency pairs including the euro/dollar and the dollar/yen. 

According to Reuters, the discount for buying the yen at future dates widened sharply as non-U.S. banks, which typically buy dollars now with sell-back contract at a future date, scrambled to procure greenbacks for the year-end.  The one-week forward discount starting from Wednesday jumped to 0.23 yen from around 0.04 yen in the middle of last week.

“Because foreign banks are away and few market players are eager to offer dollars, the forward market is very thin,” said a currency trader at a major Japanese bank. “The market is very volatile and there are hardly any trades beyond one week."

Japan Births Plunge To Lowest Level Ever Recorded As "Celibacy Syndrome" Takes Its Toll

Back in 2013 we asked "Why Have Young People In Japan Stopped Having Sex?" And while that might sound like nothing more than a clever headline intended for The Onion, it was prompted by a very serious survey conducted by the Japan Family Planning Association which found that 45% of Japanese women aged 16-24 and 25% of men were "not interested in or despise sexual contact"...a growing trend that has revealed itself via the nation"s persistently declining birth rates.  In fact, "celibacy syndrome" has become of such great concern for the Japanese government that it is considered a bit of a looming national catastrophe....a catastrophe that seems to be getting worse at an accelerating rate.

According to data released today by Japan"s Ministry of Health, Labor and Welfare, child births in Japan will drop to just 941,000 in 2017, the lowest since data first started being recorded in 1899, and nearly 65% below the peak birth rate from the late 1940"s.

As the Financial Times notes today, the persistent declines in Japanese birth rates come despite the best efforts of central planners to encourage population growth via a litany of government entitlement programs aimed at helping young families cover the cost of childrearing...

The government of Shinzo Abe, prime minister, has made raising Japan’s birth rate a priority. On Friday it approved a budget that takes the first steps towards providing free pre-school, private high school and university education in an effort to reverse the trend.

 

Unless the low birth rate is reversed, the only option to increase Japan’s population would be for it to take in more immigrants. Yet despite high inflows of guest workers drawn by the strong economy, Japanese politicians have been reluctant to debate the subject.

 

Mr Abe’s government has instead set a target to raise the total fertility rate to 1.8. Officials hope the strong economy, combined with measures making it easier for women to combine work and childcare, will encourage families to have more children.

 

“We’d like to halt the decline by advancing our strategy to support children and make an easier environment for giving birth,” the ministry said.

...they"ve basically thrown in everything except a pony.

Meanwhile, Japan"s aging population means that the number of deaths will likely rise by 3% YoY in 2017 to 1.34 million, a post-World War Two high, resulting in the largest ever natural population decline of just over 400,000.   

Unfortunately, the crisis is only expected to get worse over time as projections from the National Institute of Population and Social Security Research suggest the pace of population declines will accelerate and that by 2045 Japan will be losing about 900,000 residents a year.  On current trends, the population is set to fall from 126.5m to 88m by 2065 and to just 51m by 2115.

All of which means there is really only one thing left to do...instruct the BOJ to print even more money and start passing it out to expecting parents...which we"re pretty sure will solidify Haruhiko Kuroda"s official title of "biggest pimp in the world".

Will QE Be the Needle That Bursts the Bond Bubble in 2018?

If you wanted more evidence that Central Banks will stop at nothing to induce inflation, consider that yesterday Bank of Japan stated that it will continue with its QE program and with negative rates for as long as it takes to achieve 2% inflation.

Mind you, Japan’s economy has just posted its SEVENTH straight quarter of growth, having exited its last recession at the beginning of 2016.

Put another way, the Bank of Japan is running CRISIS-type monetary policies (NIRP and ~$750 billion in QE per year) at a time when the economy has been growing for nearly TWO YEARS.

Throw in the ECB which will continue €30 billion in QE per month in 2018 and you’ve got a combined $1.1 TRILLION in Central Bank liquidity hitting the system next year…. when inflation data is already spiking up around the globe.

Why does this matter?

As I explain in my bestselling book The Everything Bubble: the Endgame For Central Bank Policy, sovereign bonds trade based on inflation expectations.

Put simply, when inflation spikes higher, so do bond yields.

When bond yields rise, bond prices fall.

When bond prices fall, the Bond Bubble bursts.

When the Bond Bubble bursts, the EVERYTHING bubble follows.

Well, guess what? The yield on numerous sovereign bonds are already spiking, and this is BEFORE inflation has even really hit!

Put simply, the bond yields for countries representing over 60% of global GDP are already warning that the bond bubble is in major trouble.

What"s coming will take time for this to unfold, but as I recently told clients, we"re currently in "late 2007" for the coming crisis. The time to prepare for this is NOW before the carnage hits.

On that note, we are putting together an Executive Summary outlining all of these issues as well as what’s to come when The Everything Bubble bursts.

It will be available exclusively to our clients. If you’d like to have a copy delivered to your inbox when it’s completed, you can join the wait-list here:

https://phoenixcapitalmarketing.com/TEB.html

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

FX Weekly Preview: Dollar Squeeze A Growing Concern, But Longer Term Bears Likely To Temper It

Submitted by Shant Movsesian and Rajan Dhall MSTA

from fxdailyterminal.com

Over the past week, the argument that the tax reform aimed at corporates specifically could prompt a period of USD repatriation - much like an amnesty - has been growing in sentiment, and whether one believes in this, remains an upside risk we shouldn"t ignore.  Since the Fed"s much anticipated rate hike, we have seen a moderate hit on the USD reversed in full, but put in perspective, the overall ranges traded so far have been modest to say the least.  We also shouldn"t ignore the time of year, where liquidity is not at its best, though has been enough to send the major indices on Wall Street to new record highs.  There was a time this would have sent USD/JPY soaring, but it hasn"t, but times have changed and most of us can see that global growth reflected in the stock markets is a far cry from that seen through wage growth and inflation. 

There has also been some focus on cross currency basis, turning negative to further signal year end USD demand and into early 2018, which can be tied-in in part to the repatriation story above.  Some will attribute it to regulatory pressures in Europe (derivatives market) as well as Japan, and although immeasurable for the most part, is a risk worth noting given our focus for the week ahead. 

As such, we look for concurrent moves in EUR/USD and USD/JPY, with a move in the former through 1.1700 likely to correspond with a USD/JPY push for 113.50-114.00 again.  Once again, in light of the illiquid period ahead, these are merely risks we are highlighting, and given where the respective spot rates ended up on Friday night, it is noteworthy risk at this stage. 

Through 1.1700, EUR/USD will test the band of support seen in the 1.1650-1.1550 area, where the longer term interest based on the Euro zone recovery continues to carry favour.   Based on the rising PMIs in Germany and other leading states, notably France, few can argue that there is momentum here, but this is largely priced in for now as we can see in some of the relative performance in the cross rates.  Even a supported EUR/CHF rate is struggling at 1.1700. 

In the final week into Christmas, we should see the EU wide inflation reading for Nov confirmed at 1.5% while the German IFO survey will likely continue with a healthy business climate.  Italian industrial production and orders later in the week will give us some insight into whether the rest of Europe is keeping up pace, but all of the above - as we have already alluded to - will do little to materially better the EUR position for now.

USD/JPY in the meantime survived the short lived post FOMC sell off, in a move which was seemingly pre-empted as "dovish hike fade", but that lasted for all of a day at best.  We held 112.00 on the downside, with 111.50-60 the strong base lower down, and despite the longer term bias for USD weakness and a return through 110.00 at some stage, the consolidation phase looks set to continue with 114.00-115.00 yet to be retested in any substantial way. 

The BoJ meeting towards the end of the week will again maintain current policy stance aimed at getting inflation back to 2.0% target, so the only interesting potential is of any dissenters to the persistent asset purchasing and an eventual unwind.  Domestic data is improving, albeit slowly, but the central bank have their mandate - the markets have their own take, and it is one which looks likely to test the BoJ"s tolerance for JPY strength at some point down the line.  When rather than if!

In the UK, GBP looks capped now that the EU-UK passage to the round of talks on trade have been secured.  Once again, the agreements made to facilitate this are nothing more than a "statement of intent" - as David Davis put it - so we are now at the crux of the negotiation, and this should start to weigh on some of the (blind) optimism which has driven GBP to better levels across the board.  To temper this, we are not advocating a return to the doom and gloom scenario, rather some moderation which would put Cable back to levels closer to 1.3000-1.3100 rather than creating a platform for a move through 1.3500-1.3600 for 1.4000 as some have suggested.  It is all sentiment here for now.

EUR/GBP has found good support in the mid 0.8700"s, but we also see limited scope for an aggressive push through 0.9000 unless Brexit cordiality breaks down completely.  On the UK economy, notable was the lack of positive response to the bumper spending results seen for Nov.  Naturally there will be a discounting factor in pre Xmas buying incorporating the Back Friday sales, and next year"s numbers will make for a far better reading on consumer appetite and more importantly disposable income.  The final Q3 GDP print is the only notable data point next week including business investment numbers. 

We also saw some reprieve for the AUD and NZD last week, with both consistently getting hammered into their recent lows with very little breathing space.  NZD had recovered first, again, largely down to over-exhaustion and traders throwing the towel in, so suggestions that the market have eased up on their bearish sentiment on the new coalition government look a little premature, not to say "convenient" at this stage.   This is not to say that the recovery does not have a little more to run, and could be generated through the EUR and GBP crosses, with over-extensions here - much in the same way as we have seen in EUR/AUD and GBP/AUD - redressed into year end at least. 

Lots of data in NZ next week, with more business confidence surveys (ANZ), current account and trade all leading up to Friday"s Q3 GDP number. 

Little in the way of stats to consider in Australia, so markets will focus on the RBA minutes and what the central bank take is on the economy.  With bearish sentiment emanating on low wage growth, low inflation and high household debt, the AUD got a welcome boost from a 60k+ rise in jobs, which keeps hopes alive for the Phillips Curve kicking in.  Little evidence of that in the US, but hope is hope and the AUD has weakened enough for now, with 0.7500 proving a strong base.  AUD/NZD is now the one to watch, where we took out pre 1.0900 demand, but the late Sep lows ahead of 1.0800 remain intact as yet.

CAD traders have some hard data to feed on rather than hang on every speech and reported rhetoric from the BoC.  Accused of a hard turnaround from the post rate hike hawkishness, the market was once again wrong-footed on governor Poloz"s statements this week, who stated that he saw the need for less stimulus going forward.  The CAD push up was brief however, and found fresh buyers looking for an eventual push through 1.2900 based on the retrenchment in CAD rates.  The jobs report for Nov was strong however, and if CPI, retail sales and ultimately GBP can can improve on the moderate expectations (0.2% growth seen for Oct), then perhaps USD/CAD can survive a push on the heavily offered 1.2900-1.3000 area.  Fear of long(s) liquidation by some banks suggest this could facilitate a move through the above mentioned area, but this assumes intent, which again, is immeasurable.  We could also say this about strong positioning in the market for (long) EUR"s!

Nomi Prins: "Dark Money" Runs The World

Authored by Nomi Prins via The Daily Reckoning,

Few people know financial markets’ biggest secret...

For the last 40 years, most people believed the stock market always goes up. Simply buy and hold long enough, the theory went, and you could sit back and watch the money accumulate in your account. No thought or hard work needed.

It was a nifty strategy — until the idea burned most investors in 2008. Almost a decade later, the scar tissue is still fresh for many investors.

Even today, after the U.S. stock market has rallied by 271% since the bottom on March 6, 2009 — nearly tripling investors’ money — only about half of Americans are invested in the stock market, according to NPR. That’s down from two-thirds compared to a decade ago.

The rest are in cash on the sidelines. Maybe that’s been you.

And who can blame you? “Fool me once, shame on you,” the saying goes. “Fool me twice, shame on me.”

Last June, Fortune surveyed readers. 71% of respondents said “the economic system in the U.S. is rigged in favor of certain groups.”

A few years earlier, the Los Angeles Times reported “Poll finds 64% of voters believe stock market is rigged against them…”

They’re not wrong.

Somebody’s made gains from all of those sectors in the stock market. It just hasn’t been Main Street.

Since I’ve left the world of big banking, I’ve made it my mission to change that. That leads me to the catalyst for my new project…

Dark money.

Dark money is the #1 secret life force of today’s rigged financial markets. It drives whole markets up and down. It’s the reason for today’s financial bubbles.

On Wall Street, knowledge of and access to dark money means trillions of dollars per year flowing in and around global stock, bond and derivatives markets.

I learned this firsthand from my career on Wall Street. My first full year working on Wall Street was in 1987.

I wasn’t talking about “dark money” or central bank collusion back then. I was just starting out.

Eventually, I would uncover how the dark money system works… how it has corrupted our financial system… and encouraged greed to the point of crisis like in 2008.

When I moved abroad to create and run the analytics department at Bear Stearns London as senior managing director, I got my first look at how dark money flows and its effects cross borders.

The “dark money” comes from central banks. In essence, central banks “print” money or electronically fabricate money by buying bonds or stocks. They use other tools like adjusting interest rate policy and currency agreements with other central banks to pump liquidity into the financial system.

That dark money goes to the biggest private banks and financial institutions first. From there, it spreads out in seemingly infinite directions affecting different financial assets in different ways.

Yet these dark money flows stretch around the world according to a pattern of power, influence and, of course, wealth for select groups. To be a part of the dark money elite means to have control over many. How elite is a matter of degree.

These is not built upon conspiracy theories. To the contrary, alliances make perfect sense and operate publicly. Even better, their exclusive dealings and the consequences that follow are foreseeable — but only if you understand how the system works and follow the dark money flows.

It’s easy to see how this dark money affects the stock market at a high level, because we can monitor its constant movement.

Here’s the smoking gun:

The red line shows you how much “dark money” the Federal Reserve has printed since 2008.

The blue line shows you the S&P 500.

They move together — more dark money drives the market higher. Much higher.

There are dark money charts from around the world, just like the one I showed you for the Federal Reserve and U.S. stock market.

Look at this “dark money” chart from Japan, for example:

The blue line shows the dark money created by their central bank, The Bank of Japan. The red line shows Japan’s major stock index, the Nikkei 225, going up as well. The dark money drove the market much higher over the past eight years.

Or, look at this “dark money” chart from the U.K.:

Again, the blue line shows the “dark money” created since 2009 by the U.K.’s central bank, The Bank of England. The red line shows how the FTSE 100, their stock index, has followed higher in lock-step.

To invest profitably in financial markets, you need to understand the hidden power relationships that drive financial and political events. Ideologies and personal associations among elites are oblivious to political party lines and international boundaries. So is dark money.

Bubble Watch: Warning Signs That The Everything Bubble Will Burst in 2018

I believe 2018 will be the year inflation arrives.

The reason, as I’ve noted throughout mid-2017, is that multiple Central Banks, particularly the European Central Bank (ECB), Bank of Japan (BoJ) and Swiss National Bank (SNB) have maintained emergency levels of QE and money printing, despite the fact that globally the economy is performing relatively well.

All told, in 2017 alone, these Central Banks will printed over a $1.5 trillion in new money and funneled it into the financial system. This is an all-time record, representing even more money printing than what took place in 2008 when the whole world was in the grips of the worst crisis in 80 years!

And it has finally unleashed the much sought after inflation. Around the world, inflationary data are breaking out to the upside. Producer prices are soaring in the EU, Japan, China and the US.

H/T Jeroen Blokland

Why does this matter?

Because the $199 TRILLION Bond Bubble trades based on inflation.

When inflation rises, so do bond yields to compensate.

When bond yields rise, bond prices FALL..

And when bond prices fall, this massive bubble, which I call The Everything Bubble bursts.

This process has already begun. Around the world, bond yields are spiking to the upside as the bond market adjusts to the threat of future inflation.

The time to prepare for this is NOW before the carnage hits.

On that note, we are putting together an Executive Summary outlining all of these issues as well as what’s to come when The Everything Bubble bursts.

It will be available exclusively to our clients. If you’d like to have a copy delivered to your inbox when it’s completed, you can join the wait-list here:

https://phoenixcapitalmarketing.com/TEB.html

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

A Question For Every Investor

Authored by 720Global"s Michael Lebowitz via RealInvestmentAdvice.com,

Recently we received the following question from a subscriber:

“If a correction in the stock or bond markets comes, the Central Banks will buy stocks with printed money, like the Japanese Central Bank, etc. Will there ever be a shakeout of the garbage and junk in the system? I am losing all confidence.” –Ron H.

Questions like Ron’s that suggest the decay of capitalism and free markets should raise concerns for anyone’s market thesis, bullish, bearish or agnostic. What stops a central bank from manipulating asset prices? When do they cross a line from marginal manipulation to absolute price control? Unfortunately, there are no concrete answers to these questions, but there are clues.

Global central banks’ post-financial crisis monetary policies have collectively been more aggressive than anything witnessed in modern financial history. Over the last ten years, the six largest central banks have printed unprecedented amounts of money to purchase approximately $14 trillion of financial assets as shown below. Before the financial crisis of 2008, the only central bank printing money of any consequence was the Peoples Bank of China (PBoC).

The central banks’ goals, in general, are threefold:

• Expand the money supply allowing for the further proliferation of debt, which has sadly become the lifeline of most developed economies.


• Drive financial asset prices higher to create a wealth effect. This myth is premised on the belief that higher financial asset prices result in greater economic growth as wealth is spread to the masses.
  
  • “And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”– Ben Bernanke Editorial Washington Post 11/4/2010.
  
  


• Lastly, generate inflation, to help lessen the burden of debt.

QE has forced interest rates downward and lowered interest expenses for all debtors. Simultaneously, it boosted the amount of outstanding debt. The net effect is that the global debt burden has grown on a nominal basis and as a percentage of economic growth since 2008. The debt burden has become even more burdensome.

The wealth effect is putting riches in the hands of a small minority of the population, with negligible benefits, if any, flowing to the majority of the population. Bernanke’s version of the virtuous circle, as highlighted above, is far from virtuous unless you are in the upper five to ten percent of households by wealth.  To understand how a real economic virtuous circle works, we recommend you read our article The Death of the Virtuous Cycle and watch The Animated Virtuous Cycle.

Inflation has been low since 2008 and deflation continues to be a chief concern of most central bankers. Because QE, in all cases, was focused on financial asset prices and not the prices of everyday goods and services, the inflation they aimlessly seek has not occurred.

To summarize our views, largely ineffective monetary policies are providing few economic benefits. They are increasing the debt burden and furthering socially destabilizing trends. Worse, these policies are packed with consequences that lie dormant and have yet to emerge. One of our concerns, which is being heralded as a positive, is the massive distortions in financial asset prices worldwide. Consider a few of these facts below and whether they are sustainable:

• U.S. yields have been among the lowest ever on record dating back to 1776


• U.S. equity valuations have risen to levels rarely observed and from this perch have always been followed by massive losses


• Over $9 trillion in sovereign bonds yields in many European countries and Japan have negative current yields


• European junk-grade debt now trades at yields lower than U.S. Treasuries


• Veolia, a French BBB rated company, recently issued a 3-year bond at a yield of -.026%.


• Italian 3-year government bonds yield -0.337%, despite the 3^rd highest debt to GDP ratio of all developed nations (132%)


• Argentina, which has defaulted 6 times in the past 100 years, issued a $2.75 billion 100-year bond paying a paltry 8% interest


• The BOJ owns over 75% of all Japanese ETFs


• The Swiss National Bank owns 19.2 million shares of Apple, or 3% of total shares outstanding, and $84 billion in aggregate of U.S. stocks

Yes, Ron, the central bankers have clearly crossed the line between free markets and government controlled markets. To answer your question about the “shakeout,” we must wait until the inevitable day comes and asset prices are in free-fall. When this occurs, we will learn the full extent of their support and how far they have crossed the line. We like to think the central bankers are willing to endure the short-term pain of such a situation and allow the natural cycle of economies and asset prices to run their course. The reality, however, is that the pattern of their actions in the post-financial crisis era argue that they are unlikely to relinquish their grip. To the extent that authority and power is extended to the Fed through the U.S. Congress, it does not seem likely for career politicians to urge action that may be painful in the short-term but highly beneficial in the long-term.

This premonition was supported by recent statements from the October 2017 Federal Reserve minutes and appointed Fed Chairman Jerome Powell respectively. Fed Minutes:

“In light of elevated asset valuations and low financial market volatility, several participants expressed concerns about a potential buildup of financial imbalances,” further “They worried that a sharp reversal in asset prices could have damaging effects on the economy.” Jerome Powell, in prepared remarks to Congress stated: “(the Fed) will respond with force to threats to the nation’s stability.”

Putting two and two together, one can quickly figure out that falling asset prices and the “damaging effects” they will inflict on the economy will not be tolerated by the Fed. 

Ron, while we cannot answer your question with certainty, we are relatively confident the Fed and other central banks’ influence on markets will only increase in time as they continue to perpetuate the debt and economic problems they helped create. Naturally, the next question for consideration is to what extent markets may be bigger than the Fed? That is an article for another day.

After $150 Billion Buying Binge, "Tokyo Whale" Seen Paring Back ETF Purchases In 2018

A few months ago, we noted that the Bank of Japan had decided to throw every textbook out of the window and crank their plunge-protection to "11"after reports surfaced that they owned a staggering 75% of Japan"s ETFs.

The BOJ first started their buying spree in December 2010 - when they held no ETFs at all - and have since accumulated some $150 billion in aggregate holdings.  The buying was all as part of unprecedented "economic stimulus" which has undoubtedly contributed to the Nikkei 225 Stock Average surging roughly 125% since December 2010.

Here"s a quick graphical recap of the program courtesy of Bloomberg...

...and another look which shows the central bank owns three quarters of ETFs by market value...

 

...all of which has resulted in the following bubble stock market appreciation...

Not surprisingly, since the program started, everyone from the head of the country’s stock exchange to the chairman of the Japanese Bankers Association has questioned the ETF program’s size and whether it artificially depresses volatility.

Now, with the Nikkei surging to 25 year highs, analysts are increasingly saying it"s time for the BOJ to put this specific component of their many controversial bubble-blowing policies to rest.  Per Bloomberg:

Sometime next year, the BOJ will cut its annual buying target for domestic exchange-traded funds by as much as a third from the current 6 trillion yen ($53 billion), says Toru Ibayashi, head of Japanese equities at UBS Wealth Management in Tokyo. Soichiro Monji of Daiwa SB Investments Ltd. expects a similar reduction, but by the end of March.

 

“Four trillion yen,” UBS’s Ibayashi predicted. “And everybody will understand.”

 

"Fear of deflation was behind the 6 trillion yen target,” Daiwa SB’s Monji said in an interview. “We’re no longer in that kind of environment. Risks are now skewed toward the upside, rather than the downside. It’s hard for the central bank to justify its buying spree.”

 

“Given the circumstances at this point in time, it is difficult for the BOJ to keep buying ETFs at six trillion yen per year,” Ibayashi said.

Jonathan Garner, chief Asia and emerging markets equity strategist at Morgan Stanley in Hong Kong, described the ETF purchases as “perhaps the most controversial part” of the bank’s stimulus program which includes everything from negative interest rates and yield-curve control to buying tens of trillions of yen of bonds each year, on top of its stock purchases. 

Of course, not everyone agrees as Naoki Kamiyama, chief strategist for Nikko Asset Management Co. in Tokyo, and Hisao Matsuura, a strategist at Nomura Holdings Inc., both saying the BOJ won’t cut its ETF target anytime soon as "it would hurt investor confidence and make a pickup in inflation much less likely..."

You know, because every central bank"s primary objective is to boost "investor confidence" by creating massive asset bubbles that make the masses feel richer...at least until the marginal stimulus fails and the whole ponzi comes crashing down...

These Are The 30 Biggest Risks Facing Markets In 2018

Once upon a time, Wall Street analysts had just two things to worry about: interest rate risk and corporate profits - virtually everything else was derived from these.  Unfortuantely, we now live in the new normal, where central banks step in every time there is even a whiff of an imminent market correction (as BofA explained last week), and the result is that nobody know what is and what isn"t priced into the market any more, simply because the market in the conventional sense of a future discounting mechanism no longer exists (as Citi explained earlier this summer).

Which is why, paradoxically, even as the VIX slides to record lows, the number of things to worry about on Wall Street grows longer and longer. In fact, according to Deutsche Bank"s Torsten Slok, there are no less than 30 material risks investors should beware in the coming year, ranging from a U.S. equity correction to a reversal of Brexit to Irish presidential elections, to a "Bitcoin crash," rising inflation, danger from North Korea and results from special counsel Robert Mueller"s probe.

The risks should be thought of “not only as potential VIX-boosters but also as potential sources of faster or slower growth than what we have in our baseline forecast,” Slok explained in his note, which also shows that even without a major risk materializing, the GDP rebound of 2017 is unlikely to persist.

As for the recent surges and drops in Bitcoin, "you wonder where prices will even be by the end of 2017," Slok said during an appearance on CNBC"s Trading Nation broadcast.

Predicting that price swings of the cryptocurrency will remain an issue in 2018, Slok said questions about Bitcoin regulation, transparency and disclosure issues remain unanswered. "It"s mainly because it is something that I think financial markets so far have been discounting as a small issue," Slok said. "We do worry a bit that it could become more systemic, in particular, if the current trends continue into 2018."

But the Deutsche Banker"s biggest worry is understandably a spike in inflation in the coming months. Low national unemployment, growth projections for the nation"s gross domestic product, and other financial measures signal a potential rise, Slok said. As we have reportedly previously, virtually every bank from BofA to Goldman to Barclays has warned that their optimistic forecasts are null and void if inflation in the coming months spikes, forcing the Fed to tighten monetary conditions at a faster pace.

On the geopolitical front, U.S. and global uncertainty about North Korea"s test launches of ICBMs capable of reaching the U.S. mainland and other potential targets could roil financial markets. Slok cited fear that we could have a "further escalation of the situation."

The bank"s worry list, in random order and featuring both upside and downside concerns for financial markets, questioned whether Jerome Powell, the incoming Federal Reserve chairman, will be "politically driven or driven by the incoming data."

Other risks include tests for the Fed"s near chair, the potential replacement of BOJ"s head Haruhiko Kuroda, the ECB announcing its QE exit in Q2, housing bubble bursts in Canada, Australia, Sweden or Norway, a correction in the U.S. stock market where there is a mismatch between valuation and fundamentals, a harder landing than expected for China as economic growth there slows, and many other risks which would all weigh on financial markets.

"Are markets ready for even a small correction?” the Deutsche Bank strategist asked rhetorically, reminding his reads that there has not been one for "a long time."

The full list of 30 risk factors is below.

Is Bitcoin Just A Brilliant Wealth Redistribution Scheme?

Authored by Valentin Schmid via The Epoch Times,

Many older, wealthy people are losing out, while younger risk takers are getting rich...

Normally, the concept of wealth redistribution involves government using force to take from some people and give to others. But the bitcoin revolution is redistributing wealth differently.

For the sake of simplicity, and to avoid confusion, we will talk about only the original bitcoin in this article and avoid the likes of cryptocurrency products such as ethereum and initial coin offerings, as well as recent duplicates of the original protocol.

On the one hand, at a price of $15,500 and a market capitalization of $277 billion at the time of writing, bitcoin has made many people rich. Most of the early bitcoin adopters who made the real money are young and entrepreneurial, and they have been put at a disadvantage by the status quo of the current financial system of fiat and bank money.

On the other hand, we have the representatives of the old money system, the Jamie Dimons and Joseph Stiglitzs of the world, who have made a fortune using the old system (Dimon) or gained prestige and recognition talking and writing about it (Stiglitz). At this moment, they are losing out. The value of their assets is getting crushed in bitcoin terms, and more people are becoming interested in the 8-year-old cryptocurrency.

People holding bitcoin become richer not only relative to U.S. dollars, or euros, or yen, but also relative to the stock market and gold.

The price of one share of JPMorgan stock was worth 0.084 bitcoin on Jan. 3, the first trading day of the year. On Dec. 1, it’s worth only 0.0096, a decline of 89 percent. We can calculate similar numbers for the S&P 500, the 10-year Treasury, and even bitcoin’s competitor for sound money, good old gold.

Bitcoin is often compared with penny stocks, but only the best can compete with bitcoin’s 1,500 percent price rise this year and with a valuation of $277 billion, bitcoin is pushing into the sphere of the heavyweights of finance. But that’s still a far cry from the $8 trillion valuation of global gold, the $20.5 trillion U.S. government debt market, or the $80 trillion of global stocks.

Sophisticated Wealth Redistribution

So what will happen if the price of bitcoin keeps going up, to $50,000, to $100,000, or even to $1 million, a value at which its market cap ($16.7 trillion) would be roughly equal to the combined balance sheets of the Fed, the European Central Bank, and the Bank of Japan (totaling $14.5 trillion)?

It’s not that the $15,500 you spend to buy one bitcoin now is sucked up by the bitcoin blockchain and disappears out of existence.

It is transferred to the person who sold you the bitcoin, and he or she can spend it on other assets or goods and services.

If the price of bitcoin keeps going higher, the relative value of it and other assets will change, similar to the example of JPMorgan stock, which became almost 90 percent cheaper in bitcoin terms this year.

Not only will the dollars in your pocket become worth less in the process (down 92 percent in bitcoin terms this year), but also any other asset that doesn’t keep pace with the rise of bitcoin will drop. People holding bitcoin become richer not only relative to U.S. dollars, or euros, or yen, but also relative to the stock market and gold.

And all this happens without a single government rule or regulation.

However, there are other mechanisms preventing people from getting into bitcoin and participating in the upside, although none of them includes the use of force.

Intellectual Hard Work

The first such barrier is how well you understand bitcoin.

In order to “buy into” bitcoin, you have to believe in the story. Bitcoin’s main value proposition is that it is digital sound money that is not centrally controlled by a government or private party, is censorship-resistant, and is outside of the banking system.

However, though the corruption of the hybrid system of fiat government money and private bank money has been thoroughly exposed, many people still do not perceive the status quo to be a problem, nor do they see the record risks baked into the booming stock market.

It takes another college course’s worth of research to understand the technology behind bitcoin and why, despite its risks, it could provide a new monetary solution and system for the digital age and digital economy.

So for them, bitcoin doesn’t solve a problem, and therefore they won’t have a reason to expose themselves to the gut-wrenching volatility as well as the technological risk still inherent to the system.

A similar argument applies to the status-quo elite, who have greatly benefited from the corrupt system and see bitcoin as a risk to that system. This group includes almost all government officials—especially central bankers—and politicians, as well as the private banking elite. They are incentivized to defend the old system at all costs, but would be smart to hedge their exposure. Some may be doing so in secret.

So these are the first intellectual hurdles to overcome: understanding that our current money system is severely flawed, and that to prosper and make progress, humanity needs an alternative.

To fully understand this, many people spend a few years researching history and economics away from mainstream educational propaganda.

The Gold Trap

Then, there is a second trap. As most of the history of sound money is rightly focused on gold and the gold standard period of the late 1900s, some people who understand the problems of the monetary system are too beholden to their golden beliefs to wrap their heads around bitcoin.

This group of people believes—and they may well be right—that gold will reset the debt-based financial system, as it has always done in history. They are also not participating in the bitcoin upside.

It takes another college course’s worth of research to understand the technology behind bitcoin and why, despite its risks, it could provide a new monetary solution and system for the digital age and digital economy.

It then requires a more nuanced and probability-based investment approach to see that while bitcoin is far riskier than gold and has some disadvantages compared to the yellow metal, it also provides far higher upside. The gold market is relatively expensive, at $8 trillion, while bitcoin is relatively cheap, at $277 billion. Bitcoin also has some striking advantages over gold, which warrant a rise in price.

Once you understand the value proposition and are ready to buy in, you need to jump through some hoops to register with an exchange and safely store your bitcoin, which is another hurdle many people who do not fully understand bitcoin cannot clear.

Winners and Losers

So, by and large, and of course with the usual exceptions and caveats, the old guard of both the political and financial systems and the old guard of sound-money people are not participating in the upside of bitcoin.

This is not because they don’t have any money to invest or because the government prohibits them from doing so. It is their own intellectual inflexibility, lack of curiosity, and risk-aversion that bars them from entry.

As bitcoin becomes ever more secure and ever more mainstream, more people from these groups will hop on the gravy train, but they will be able to afford fewer bitcoin with their assets than they would have now or five years ago.

As these people bid up the price to the stratosphere, the early movers will be richly rewarded and their purchasing power will increase relative to goods and services—and relative to the very assets the old guard now owns that were previously out of reach.

So who are the people who are gaining on the status quo with their crazy cyberpunk cryptocurrency?

They are the pioneers and innovators who built the bitcoin ecosystem and keep working tirelessly to make it more secure and ever more consumer friendly.

It is the former finance professional who learned about sound money on YouTube and spent months educating himself on how bitcoin works.

It is the software developer who first looked at the bitcoin protocol out of technological interest and then learned everything about money and monetary history.

It is the sophisticated investor who understands that a zero interest policy boosts his stock holdings in the short term but exposes them to massive downside when rates start rising again. He knows that diversifying his portfolio with assets outside of the banking system actually increases his risk-adjusted return. He does not think he needs to make an either-or choice between bitcoin and gold.

It is the prudent saver who understands that spending less on frivolous consumption is worth it when he can save in a currency with a sound monetary policy.

Of course, every technology and every sector in finance has its bad apples, scammers, and speculators who have no idea about the underlying value proposition. Bitcoin does, too, but they don’t seem to go beyond the scope and proportion we have seen in banking and government.

In spite of this usual caveat, bitcoin favors risk takers, innovators, savers, and people who are curious and persistent enough to learn new technology as well as history. It favors the little people who are willing to take some risks, over the old elite fighting to maintain their privilege. By rewarding these positive qualities, the voluntary bitcoin wealth redistribution creates a positive incentive cycle, much different than the old model based on bureaucratic force.

Bitcoin Has A "Whale" Problem: 1,000 Investors Control Nearly Half The Market

If Jay Gould were alive today, he would"ve traded bitcoin.

Perhaps the most blatant hypocrisy perpetrated by bitcoin evangelists is their insistence that bitcoin and other digital currencies represent a return to a truly democratic financial system beyond the control of banks and other special interests, where players small and large can earn enormous profits simply by HODLing.

Of course, this idealistic take couldn’t be further from the truth. As Bloomberg points out, the markets for bitcoin and most of its cryptocurrency clones more closely resemble the US equity market of the Gilded Age, where a handful of powerful traders and brokers colluded to move prices in their favor. And because securities laws at the time were virtually nonexistent, the big players minted suckers with impunity.

According to Bloomberg, about 1,000 so-called “whales” control 40% of the bitcoin in circulation, giving them unrivaled leverage over the broader market. And because there are no laws explicitly banning collusion in digital currency markets, only the most blatant pump-and-dump operations risk being prosecuted as fraud.

And with the price skyrocketing like it has in recent days, the incentive for these traders to begin taking profits has never been more pressing.

About 40 percent of bitcoin is held by perhaps 1,000 users; at current prices, each may want to sell about half of his or her holdings, says Aaron Brown, former managing director and head of financial markets research at AQR Capital Management. (Brown is a contributor to the Bloomberg Prophets online column.) What’s more, the whales can coordinate their moves or preview them to a select few. Many of the large owners have known one another for years and stuck by bitcoin through the early days when it was derided, and they can potentially band together to tank or prop up the market.

 

“I think there are a few hundred guys,” says Kyle Samani, managing partner at Multicoin Capital. “They all probably can call each other, and they probably have.” One reason to think so: At least some kinds of information sharing are legal, says Gary Ross, a securities lawyer at Ross & Shulga. Because bitcoin is a digital currency and not a security, he says, there’s no prohibition against a trade in which a group agrees to buy enough to push the price up and then cashes out in minutes.

As Bloomberg explained, the manipulation in bitcoin is extreme because many of the big players know each other from having been involved in the digital currency space since its infancy. Add to this the fact that the risks are incredibly asymmetrical – there’s tremendous upside in terms of profits if they can successfully pull it off. And the chances of them drawing the scrutiny of law enforcement are relatively low.

“As in any asset class, large individual holders and large institutional holders can and do collude to manipulate price,” Ari Paul, co-founder of BlockTower Capital and a former portfolio manager of the University of Chicago endowment, wrote in an electronic message. “In cryptocurrency, such manipulation is extreme because of the youth of these markets and the speculative nature of the assets.”

 

The recent rise in its price is difficult to explain because bitcoin has no intrinsic value. Launched in 2009 with a white paper written under a pseudonym, it’s a form of digital payment maintained by an independent network of computers on the internet‚ using cryptography to verify transactions. Its most fervent believers say it could displace banks and even traditional money, but it’s only worth what someone will trade for it, making it prey to big shifts in sentiment.

Case in point: Some of these so-called whales admitted in an interview with Bloomberg that they regularly incorporate what would in the equity market be considered material nonpublic information into their trading strategies.

Like most hedge fund managers specializing in cryptocurrencies, Samani constantly tracks trading activity of addresses known to belong to the biggest investors in the coins he holds. (Although bitcoin transactions are designed to be anonymous, each one is associated with a coded address that can be seen by anyone.) When he sees activity, Samani immediately calls the likely sellers and can often get information on motivations behind their sales and their trading plans, he says. Some funds end up buying one another’s holdings directly, without going into the open market, to avoid affecting the currency’s price. “Investors are generally more forthcoming with other investors,” Samani says. “We all kind of know who one another are, and we all help each other out and share notes. We all just want to make money.” Ross says gathering intelligence is legal.

And investors who buy into smaller tokens are at an even greater disadvantage.

Ordinary investors are at an even greater disadvantage in smaller digital currencies and tokens. Among the coins people invest in, bitcoin has the least concentrated ownership, says Spencer Bogart, managing director and head of research at Blockchain Capital. The top 100 bitcoin addresses control 17.3 percent of all the issued currency, according to Alex Sunnarborg, co-founder of crypto hedge fund Tetras Capital. With ether, a rival to bitcoin, the top 100 addresses control 40 percent of the supply, and with coins such as Gnosis, Qtum, and Storj, top holders control more than 90 percent. Many large owners are part of the teams running these projects.

Unsurprisingly, Bloomberg managed to find someone to defend the status quo: Whales won’t dump their holdings, this person argued, because they “have faith in the long-term potential of the coins.” This strikes us as a naïve assumption.

Some argue this is no different than what happens in more established markets. “A good comparison is to early stage equity,” BlockTower’s Paul wrote. “Similar to those equity deals, often the founders and a handful of investors will own the majority of the asset.” Other investors say the whales won’t dump their holdings, because they have faith in the long-term potential of the coins. “I believe that it’s common sense that these whales that own so much bitcoin and bitcoin cash, they don’t want to destroy either one,” says Sebastian Kinsman, who lives in Prague and trades coins. But as prices go through the roof, that calculation might change.

While the concentrated holdings of the modern bitcoin market should give potential investors pause, in some ways, it"s not all that different from the modern equity market. As we pointed out back in September, the Bank of Japan owns a staggering 75% of the domestic ETF market. Increasingly, equity ownership in the US and around the world is becoming increasingly concentrated in the hands of central banks, sovereign wealth funds and the largest asset managers like BlackRock, Fidelity and Vanguard.

While the whales can exercise unrivaled influence over the price of bitcoin, they aren"t the only players in the bitcoin market with a natural inclination toward self-dealing. As Bill Blaine pointed out, nearly every bank knows bitcoin"s extraordinary gains are a crowd delusion fuelled by the extraordinary promise of free wealth.

Yet, many will be willing to trade and settle them for their clients – largely retail. So, while the bitcoin bubble has (for now) blessed hundreds of thousands of mom and pop investors with spectacular returns, these gains will only continue as long as the cartel allows them too.