Billionaire Tycoon Will Be Next President Of Chile

A billionaire who has been described as one of the world’s wealthiest politicians just won his second non-consecutive term as president of Chile when he defeated his center-left opponent in what observers are calling a landslide victory in Sunday"s election.

As the Washington Post reported, Sebastián Piñera, of the right-leaning National Renovation party and conservative Let’s Go Chile coalition, defeated center-left candidate Alejandro Guillier, of the ruling New Majority coalition, by 9 percentage points, turning the current government out of office. Piñera previously governed Chile between 2009 and 2014. Turnout increased between yesterday’s vote and a Nov. 19 runoff, as large numbers of conservative voters showed up at the polls, while leftists stayed home.

Guillier conceded and congratulated his opponent on his win and his return to the presidency after a four-year gap, according to the BBC.

Like we mentioned above, Piñera is a billionaire who once owned the television channel Chilevision, a large share of Lan Chile airlines, and the Colo-Colo soccer team. He won despite criticisms of his offshore holdings and use of tax havens. He joins Trump and Adrej Babis, a Czech tycoon who rode to electoral victory in a landslide in his home country earlier this year.

As WaPo points out, the 67-year-old will succeed Socialist President Michelle Bachelet, whose New Majority coalition came to power in 2014 on a platform promising sweeping change. Her administration reformed Chile’s tax and education systems and legalized abortion in the event of rape, endangerment to the mother’s life, or an unviable pregnancy. Bachelet began reforming Chile’s constitution, submitting a bill to the Congress earlier this year that would allow for a constitutional convention. Pinera is apparently a fan of many of these reforms and has vowed to preserve them. According to Reuters, Pinera said on Monday he would work to form a “broad cabinet, of continuity and change,” as he sought to strike a tone of conciliation a day after his resounding victory.

Regarding the bill calling for a constitutional convention to reform the dictatorship-era constitution, Pinera said he was in agreement “of perfecting it but in a climate of unity,” according to Reuters.

Pinera’s victory didn’t represent a sharp turn to the right for Chile - the world’s largest copper producer and widely considered Latin America"s most-stable economy - as it did exhaustion with Bachelet, whose second term was clouded by accusations of corruption, including an incident involving her son and daughter-in-law. The media and opposition politicians condemned Bachelet’s family for having secured a loan days before her 2013 victory to purchase land that was resold shortly thereafter, generating millions of dollars in profit. Though leftists weren’t the only ones impugned by scandal during her tenure: The right-wing Independent Democratic Union party was implicated in a campaign finance scandal, leading many Chileans to perceive the overall political system as corrupt. Bachelet leaves office with a dismal 23% approval rating.

Though Pinera’s victory is the latest in a wave of support for right-wing candidates across South America. Last year and this year, right-wing parties have won in Argentina and Peru. In Brazil, the impeachment of Dilma Rousseff brought right-wing Michel Temer to office.

According to WaPo, support for leftists parties was still strong during the runoff race, forcing Pinera to move to the center on issues like education and pensions, and managed to exploit divisions between the country’s far-left and center-left factions that caused many voters to stay home in the final round.

Piñera represents a coalition of conservative parties, but his victory does not signal a right turn. In the first round, Piñera won 36.6 percent of the vote, while Guillier took 22.7 percent, and the further left Broad Front candidate, Beatriz Sánchez, won 20.27 percent. The Broad Front increased its seats from 3 to 20 in the lower house, surpassing expectations. The coalition’s strong performance shows support for leftist ideology and pushed Guillier to the left during the second-round campaign; he changed his position on student debt forgiveness and pension reform.

 

Piñera sought to woo centrist voters by shifting his position on education and pension policy, while also mobilizing the far-right, in part because far-right independent José Antonio Kast did well in the first round. Kast ran a nationalist campaign that called for the construction of a wall between Chile and Peru and won just under 8 percent of votes. Piñera attempted to attract these voters, accusing the center-left parties of moving Chile in the direction of Venezuela and hinted that voter fraud had helped the center-left in the first round. These appeals likely motivated increased conservative turnout in Sunday’s runoff election.

If there’s any broader takeaway from the vote, it’s that Chile’s center is vanishing. In the first round, centrist Christian Democratic Party candidate Carolina Goic won only 5.88% of the vote.

Still, while he won the presidency by a wide margin, Pinera’s administration faces seemingly insurmountable obstacles in the battle to get things done.

This morning, he shared breakfast with president Bachelet and her family.

 

Newly elected president Piñera shares breakfast with president Bachelet and Min. of National Affairs Mario Fernandez, discussing transition of power. pic.twitter.com/0jC6H7116z

— SantiagoTimes (@SantiagoTimes) December 18, 2017

 

His coalition controls only 73 of the 155 seats in the lower house. The composition of congress means that the president will need support from the opposition to pass legislation. As we already noted, with fewer centrist lawmakers, the divisiveness in the legislature might soon rival the US Congress.

This may reinforce the electorate’s perception that Chile is “stuck,” generating further discontent.

Pinera will lead Chile until his term ends in 2022.
 

Net Neutrality – The End Of Google"s Biggest Subsidy

Authored by Tom Luongo,

Net Neutrality is gone.  Good riddance.

Lost in all of the theoretical debate about how evil ISPs will create a have/have-not divide in Internet access, is the reality that it already exists along with massive subsidies to the biggest bandwidth pigs on the planet – Facebook, Google, Twitter, Netflix and the porn industry.

Under Net Neutrality these platforms flourished along with the rise of the mobile internet, which is now arguably more important than the ‘desktop’ one in your home and office. 

Google and Apple control the on-ramps to the mobile web in a way that Net Neutrality proponents can only dream the bandwidth providers like Comcast and AT&T could.

Because, in truth, they can’t.  Consumers are ultimately the ones who decide how much bandwidth costs, not the ISPs.  We decide how much we can afford these creature comforts like streaming Netflix while riding the bus or doing self-indulgent Instagram videos of our standing in line at the movies (if that’s even a thing anymore).

Non-Neutrality Pricing

Net Neutrality took pricing of bandwidth out of the hands of consumers.  It handed the profits from it to Google, Facebook and all the crappy advertisers spamming video ads, malware, scams, and the like everywhere.

By mandating ‘equal access’ and equal fee structures the advertisers behind Google and Facebook would spend their budgets without much thought or care.  Google and Facebook ad revenue soared under Net Neutrality because advertisers’ needs are not aligned with Google’s bottom line, but with consumers’.

And, because of that, the price paid to deliver the ad, i.e. Google’s cost of goods sold (COGS), thanks to Net Neutrality, was held artificially low.  And Google, Facebook and the Porn Industry pocketed the difference.

They grew uncontrollably.  In the case of Google and Facebook, uncontrollably powerful.

That difference was never passed onto the ISP who could then, in turn, pass it on to the consumer.

All thanks to Net Neutrality.

Undercapitalized Growth

With the rise of the mobile web bandwidth should have been getting cheaper and easier to acquire at a much faster rate than it has.  But, it couldn’t because of Net Neutrality.  It kept rates of return on new bandwidth projects and new technology suppressed.

Money the ISP’s should have been spending laying more fiber, putting up more cell towers, building better radios went to Google to fritter away on endless projects that never see the light of day.

The ISP’s actually suffered under Net Neutrality and so did the consumers.

And therefore, Net Neutrality guaranteed that the infrastructure for new high-speed bandwidth would grow at the slowest possible rate, still governed by the maximum the consumer was willing to pay for bandwidth, rather than what the consumer actually demanded.

And, once obtained that power was then used to punish anyone who held different opinions from the leadership in Silicon Valley.

Think it through, Net Neutrality not only subsidized intrusive advertising, phishing scams and on-demand porn but also the very censorship these powerful companies now feel is their sacred duty to enforce because the government is now controlled by the bad guys.

Getting rid of Net Neutrality will put the costs of delivering all of this worthless content back onto the people serving it.  YouTube will become more expensive for Google and all of the other content delivery networks.  Facebook video will eat into its bottom line.

The ISP’s can and should throttle them until they ‘pay their fair share,’ which they plainly have not been.

The Net effect of Net Neutrality is that your ISP may charge you more in the short run for Netflix or Hulu.  Or, more appropriately, Netflix and Hulu will have to charge you more and we’ll find out what the real cost of delivering 4k streaming content to your iPhone actually costs.

But, those costs will then go to the ISP’s such that they can respond to demand for more bandwidth.  Will they try and overcharge us?  Of course.  AT&T is just as bad as Google and/or Facebook.

But, we have the right to say no.  To stop using the services the way Net Neutrality encouraged us to through mispricing of service.  If the ISP’s want more customers then they’ll have to bring wire out to the hinterlands.

Inflated Costs, Poor Service

Net Neutrality proponents kept telling us this was the way to help keep the internet available to the poor and the rural.  Nonsense.  It kept the internet from expanding properly into the hinterlands.

I live just over the county line in rural North Florida.  To the south is a town with cable and DSL.   Between cable franchise monopolies retarding expansion across county lines and Net Neutrality keeping margins thin, my home was 10 years behind everyone else getting decent bandwidth to keep up with the needs of the modern Internet.

Bandwidth needs artificially inflated, I might add, by the misaligned cost structure engendered by Net Neutrality in the first place.

It took forever for my phone provider to upgrade the bandwidth across the county line.  I begged them for a second line for internet service, they wouldn’t even talk to me.  Why?  The return on that new line wasn’t high enough for them.

If Google was passing some of the profits from Adwords onto the ISPs I’d have multiple choices for high-speed internet versus just one DSL provider.

As always, whenever the political left tries to protect the poor they wind up making things worse for them.

The Ways Forward

The news is good for a variety of reasons. With Net Neutrality gone a major barrier to entry for content delivery networks is gone.

Blockchain companies are building systems which cut the middle man out completely, allowing content creators to be directly tipped for their work versus being supported by advertising no one watches, wants or is swayed by.

Services like Steemit and the distributed application already built and to be built on it point the way to social media cost models which are sustainable and align the incentives properly between producers of content and consumers.

Steem internalizes the bandwidth costs of using the network and pays itself a part of its token reward pool to cover those costs.  So, all that’s left is content producer and their fans.  Advertisers are simply not needed to maintain the network.

Net Neutrality was a trojan horse designed to replicate the old shout-based advertising model of the golden age of print and TV advertising.  It was a way to control the megaphone and promote a particular point of view.

Look no further than the main proponents of it.  George Soros and the Ford Foundation are two of the biggest lobbyists for Net Neutrality.  Only the political left and its Marxian fantasies of evil middle men creating monopolies fell for the lies, as they were supposed to.

The rest of us were like, “Really?  This is not a problem.”  And it wasn’t until you looked under the hood and realized all they stood to gain by it.

Now, with Net Neutrality gone the underlying problem can be addressed; franchise monopolies of cable and phone companies in geographic areas.  These laws are still in effect.  They still hang like a spectre over the entire industry.  Like Net Neutrality, these laws concentrate capital into the hands of the few providers big enough to keep out the competition.

So, instead of championing the end of franchise monopolies, which county governments love because they get a sizable cut of the revenue to fund non-essential programs, the Left made things worse by championing Net Neutrality.

That also needs to end.  Even if you believe that franchise monopolies were, at one point, necessary.  They are not now.  IP-based communication is now fundamentally different than copper wire for discrete services like phone and cable.  Let people run all the copper and fiber they want.  There’s plenty of room in the conduit running under our sidewalks and streets.

Let a thousand flowers bloom, as the great Lew Rockwell once told me.

Then and only then will the Internet be free.

DOJ, AT&T Head To Court As Settlement Talks Collapse

It looks like AT&T is going to fight the Department of Justice"s injunction to stop the wireless provider from acquiring Time Warner in court, now that settlement talks between the two parties have failed, according to a court document filed Friday that was obtained by Reuters.

Last month, the DOJ revealed that it planned to sue to stop AT&T, owner of DirecTV and the No. 2 U.S. wireless company, from buying Time Warner for $85 billion, ostensibly because of concerns that it could raise prices for rivals and pay-TV subscribers and hamper the development of online video. According to several leaks in the press, the DOJ"s aim was to push AT&T and TW to agree to spin off CNN and the rest of the Turner Broadcasting Network properties. That, of course, sounds suspiciously similar to a threat issued by President Donald Trump during the campaign, when he threatened to stop the merger between the two parties.

“All parties have engaged in good-faith settlement negotiations, but despite their efforts, have not been able to settle the matter,” the filing said.

Accoding to Reuters, AT&T and Time Warner last month offered to agree to terms that would forbid Turner from “going dark” on any distributor for seven years after the deal closes if they were to reach an impasse in negotiations with the DOJ. In preparation for the trial, final fact witness lists will be exchanged by Feb. 2 and all pretrial motions should be filed by March 12, according to the court filing.

As we explained last month, there"s little doubt that AT&T - with its inferior network and dependence on copper telephone lines - badly needs the Time Warner deal.

There is no doubt that AT&T needs the Time Warner deal...badly. Their land-based distribution network, which is dependent on old copper telephone lines, is far inferior to their cable competitors which have since installed coaxial or fiber lines that supply far faster internet speeds to data-hungry homes and businesses.

 

Of course, just a few years ago, AT&T attempted to "solve" their copper network problem by ignoring the value of land-based networks altogether and instead buying a satellite TV business, DirecTV, for $67 billion.  Predictably, that decision has been a total disaster as DirecTV has done nothing but shed hundreds of thousands of subscribers ever since...something AT&T management should have been able to predict if they didn"t discredit the growing value of streaming services...a necessary oversight for a company with an inferior network.

 

Now, rather than ignore the value of distribution, AT&T has apparently decided to pursue mergers that allow them to control content...content which the DOJ feels could be held hostage to make their inferior network somewhat more attractive to customers thus stemming the tide of subscriber losses for AT&T.

Of course, if the DOJ prevails, the precedent may kill any and all hopes of future mega media deals between distribution companies and content providers, and have a chilling effect on future M&A.

A trial to decide the matter is set to begin on March 19, and run about 15 days, according to the filing. The two sides noted in the filing, which set out an agreed schedule leading up to the March trial, that there had been unsuccessful settlement discussions between the two.

Silk Road Fever Grips The Russian Far East And Boosts Economy

Authored by Pepe Escobar via The Asia Times,

China"s Belt and Road Initiative heralds a new era with mega infrastructure projects dotting the landscape...

If  you are looking for the latest breakthroughs in trans-Eurasian geoeconomics, you should keep an eye on the East – the Russian Far East. One interesting project is the new state-of-the-art $1.5 billion Bystrinsky plant. Located about 400 kilometers from the Chinese border by rail and tucked inside the Trans-Baikal region of Siberian, it is now finally open for business.

This mining and processing complex, which contains up to 343 million tonnes of ore reserves, is a joint venture between Russian and Chinese companies. Norilsk Nickel, Russia’s leading mining group and one of the world’s largest producers of nickel and palladium, has teamed up with CIS Natural Resources Fund, established by President Vladimir Putin, and China’s Highland Fund.

But then, this is just the latest example of Russian and Chinese cooperation geared around the New Silk Roads or the Belt and Road Initiative (BRI). Beijing is the world’s largest importer of copper and iron ore, and virtually the entire output from Bystrinsky will go to the world’s second largest economy.

Naturally, to cope with production, a massive new road and rail network has been rolled out, as well as substantial infrastructure, in the heart of this wilderness. Yet there is another major BRI initiative about 1,000km east of Bystrinsky. Work started on the Amur River Bridge, or Heilongjiang as the Chinese call it, in 2016 and the road and rail links should be finished in 2019.

The project is being developed by Heilongjiang Bridge Company, a Russia-China joint venture, along a crucial stretch of the Russian-Chinese border. It will also be part of a huge trade corridor, which will transport iron ore to China from the Kimkan mine, owned by Hong Kong’s IRC Ltd,  in Russia.

The Amur River Bridge, linking Heihe, in Heilongjiang province, with Blagoveshchesnk in the Russian Far East, is a natural part of the New Silk Roads program. It is well connected to one of BRI six major corridors – the China-Mongolia-Russia Economic Corridor, or CMREC, via the Trans-Siberian Railway all the way to Vladivostok.

CMREC’s additional importance is that it will connect BRI with the Russia-led Eurasia Economic Union, or EAEU, as well as the Mongolian Steppe Road program. CMREC has two key links. One involves China’s Beijing-Tianjin-Hebei to Hohhot before winding on to Mongolia and Russia. The other is from China’s Dalian, Shenyang, Changchun, Harbin and Manzhouli to Chita in Russia, where the Bystrinsky plant is located.

Numerous aspects of the Russian-Chinese intranet were extensively discussed at the Third Eastern Economic Forum in Vladivostok in September. CMREC involves closer cooperation, especially in energy, mineral resources, high-tech manufacturing, agriculture and forestry. Chinese Vice-Premier Wang Yang had already announced even closer economic cooperation with Russia, including a $10 billion China-Russia Investment Cooperation Fund in yuan for BRI and EAAU projects.

Monetary integration

Part of this will include Russian-Chinese investment funds, known as Dakaitaowa, or “to open a matryoshka doll”. Monetary integration and energy cooperation are all part of an ambitious Russian-Chinese package. This will allow trade to be settled in yuan, instead of US dollars, in Moscow via the Industrial and Commercial Bank of China. Products promoted under the http://www.madeinrussia.com “Made in Russia” brand are bound to get a boost.

According to the China General Administration of Customs, Russia continues to be the country’s leading crude oil supplier, exporting more than one million barrels per day, ahead of Saudi Arabia and Angola. Exports of Russian oil to China have more than doubled during the past six years.

Last month, the Russian parliament approved the draft of a conservative 2018-2020 Russian federal budget at $279 billion. This included increased spending in the social sector, a higher minimum wage, and increased salaries for teachers and healthcare workers.

Manufacturing in Russia has actually grown in absolute terms during the past decade along with a slight rise in GDP. Contrary to Western perceptions, energy revenue in Russia amounts to only around 30 percent of the federal budget. In absolute terms, it actually fell from 2014 to 2016, while non-oil and gas income has increased steadily since 2009.

Those were the days when Saudi Arabia and the Gulf petro-monarchies were dumping excess capacity on the oil market in a price war that was bound to ruin Russia’s finances. The draft budget assumes the price of oil will stay around at least $40.80 a barrel during the next few years. In fact, it may actually rise from its current $61.03 for the OPEC basket. Of course, that would boost Russia’s reserves.

Natural resources

As for exports, oil accounts for around 26 percent of Russia’s GDP. Oil and gas as a percentage of total exports fell during the past two years from 70 percent to 47 percent, but they are still the country’s top export money earners. When you add other commodities, such as iron, steel, aluminum and copper, revenue from natural resources come to more than 75 percent of Russia’s total exports.

But the key problem ahead for the country is the debt of provincial governments, and not defense, which is much lower than during Gorbachev’s reign in the late 1980s. Still, the integration of BRI and EAEU now offers excellent opportunities for Russia.

To put this into context, we have to go back to the 1689 Treaty of Nerchisk at a time when Manchus, an ethnic minority in China and the people from whom Manchuria derives its name, were deeply concerned about Cossack incursions into their lands.

Nerchisk was the first Chinese treaty with a European power, and it safeguarded borders and regulated relations between the two neighbors for nearly two centuries. For the first time, Russians could trade directly with the Middle Kingdom and negotiate as equals. No Russian or Manchu was spoken, but Latin, via two Jesuit interpreters. They were well positioned in the Qing court by supplying the Kangxi emperor with weapons, as well as advanced courses in geometry and astronomy.

Century of humiliation

Now, compare this with the “unequal treaties” of the 19^th century with England, France, the United States and Germany, known as the “century of humiliation” in China. It is true that Russia gobbled up Chinese lands back then, as well as securing the Amur basin and the eastern side of the Sikhote-Alin mountains, which denied the country access to the Sea of Japan.

At the time, the Qing dynasty was helpless. Everything was later formalized by, well, treaties. China lost what was known as Outer Manchuria and Eastern Tartary. Today this whole region is known as Primorsky Krai, Russia’s Maritime Province. Then in 2006, President Putin solemnly announced the resolution of all border disputes with China along the Amur. Beijing de facto agreed.

Now, with the integration of BRI and the EAEU, Russia has a great chance of fulfilling part of its Pacific Destiny, first envisaged when the Trans-Siberian rail link was finished in 1905. Today, that vision is alive with gold and timber in the mountains north of the Amur, fish in the Sea of Okhotsk and the Bering Sea, and gas reserves from Sakhalin island all part of a modern export chain.

Crypto-Cornucopia Part 2 - "This System Is Garbage, How Do We Fix It?"

Authored by Dr. D via Raul Ilargi Meijer"s The Automatic Earth blog,

Part 1 "Bitcoin Is A Trust Machine" here.

You have to understand what exchanges are and are not. An exchange is a central point where owners post collateral and thereby join and trade on the exchange. The exchange backs the trades with their solvency and reputation, but it’s not a barter system, and it’s not free: the exchange has to make money too. Look at the Comex, which reaches back to the early history of commodities exchange which was founded to match buyers of say, wheat, like General Mills, with producers, the farmers. But why not just have the farmer drive to the local silo and sell there? Two reasons: one, unlike manufacturing, harvests are lumpy. To have everyone buy or sell at one time of the year would cripple the demand for money in that season. This may be why market crashes happen historically at harvest when the demand for money (i.e. Deflation) was highest. Secondly, however, suppose the weather turned bad: all farmers would be ruined simultaneously.

Suppose the weather then recovered: the previous low prices are erased and any who delayed selling would be rich. This sort of random, uncontrolled, uninsurable event is no way to run an economy, so they added a small group of speculators into the middle. You could sell wheat today for delivery in June, and the buyer would lock in a price. This had the effect of moderating prices, insuring both buyers AND sellers, at the small cost of paying the traders and speculators for their time, basically providing insurance. But the exchange is neither buyer, seller, nor speculator. They only keep the doors open to trade and vet the participants. What’s not immediately apparent is these Contracts of Wheat are only wheat promises, not wheat itself. Although amounts vary, almost all commodities trade contracts in excess of what is actually delivered, and what may exist on earth. I mean the wheat they’re selling, millions of tons, haven’t even been planted yet. So they are synthetic wheat, fantasy wheat that the exchange is selling.

A Bitcoin exchange is the same thing. You post your Bitcoin to the exchange, and trade it within the exchange with other customers like you. But none of the Bitcoin you trade on the exchange is yours, just like none of the wheat traded is actual wheat moving on trucks between silos. They are Bitcoin vouchers, Bitcoin PROMISES, not actual Bitcoin. So? So although prices are being set on the exchanges – slightly different prices in each one – none of the transfers are recorded on the actual Bitcoin Ledger. So how do you think exchanges stay open? Like Brokers and Banks, they take in the Bitcoin at say 100 units, but claim within themselves to have 104.

Why? Like any other fractional reserve system, they know that at any given moment 104 users will not demand delivery. This is their “float” and their profit, which they need to have, and this works well as far as it goes. However, it leads to the problem at Mt. Gox, and indeed Bear Sterns, Lehman and DeutscheBank: a sudden lack of confidence will always lead to a collapse, leaving a number of claims unfulfilled. That’s the bank run you know so well from Mary Poppins’ “Fidelity Fiduciary Bank”. It is suspected to be particularly bad in the case of Mt. Gox, which was unregulated. How unregulated? Well, not only were there zero laws concerning Bitcoin, but MTGOX actually stands for “Magic The Gathering Online eXchange”; that is, they were traders of comic books and Pokemon cards, not a brokerage. Prepare accordingly.

The important thing here is that an exchange is not Bitcoin. On an exchange, you own a claim on Bitcoin, through the legal entity of the exchange, subject only to jurisdiction and bankruptcy law. You do not own Bitcoin. But maybe Mt.Gox didn’t inflate their holdings but was indeed hacked? Yes, as an exchange, they can be hacked. Now you only need infiltrate one central point to gain access to millions of coins and although their security is far better, it’s now worth a hacker’s time. Arguably, most coins are held on an exchange, which is one reason for the incredibly skewed numbers regarding Bitcoin concentration. Just remember, if you don’t hold it, you don’t own it. In a hack, your coins are gone.

If the exchange is lying or gets in trouble, your coins are gone. If someone is embezzling, your coins are gone. If the Government stops the exchange, your coins are gone. If the economy cracks, the exchange will be cash-strapped and your coins are frozen and/or gone. None of these are true if YOU own your coins in a true peer-to-peer manner, but few do. But this is also true of paper dollars, gold bars, safe deposit boxes, and everything else of value. This accounts for some of the variety of opinions on the safety of Bitcoin. So if Polinex or Coinbase gets “hacked” it doesn’t mean “Bitcoin” was hacked any more than if the Comex or MF Global fails, that corn or Yen were “hacked”. The exchange is not Bitcoin: it’s the exchange. There are exchange risks and Bitcoin risks. Being a ledger Bitcoin is wide open and public. How would you hack it? You already have it. And so does everybody else.

So we’ve covered the main aspects of Bitcoin and why it is eligible to be money. Classically, money has these things:

 

1. Durable- the medium of exchange must not weather, rot, fall apart, or become unusable.

2. Portable- relative to its size, it must be easily movable and hold a large amount of value.

3. Divisible- it should be relatively easy to divide with all parts identical.

4. Intrinsically Valuable- should be valuable in itself and its value should be independent of any other object. Essentially, the item must be rare.

5. Money is a “Unit of Account”, that is, people measure other things, time and value, using the units of value to THINK about the world, and thus is an part of psychology. Strangely that makes this both the weakest and strongest aspect of:

6. “The Network Effect”. Its social and monetary inertia. That is, it’s money to you because you believe other people will accept it in exchange.

The Score:

 

1. Bitcoin is durable and anti-fragile. As long as there is an Internet – or even without one – it can continue to exist without decay, written on a clay tablet with a stylus.

 

2. Bitcoin is more portable than anything on earth. A single number — which can be memorized – can transport $160B across a border with only your mind, or across the world on the Internet. Its portability is not subject to any inspection or confiscation, unlike silver, gold, or diamonds.

 

3. Bitcoin is not infinitely divisible, but neither is gold or silver, which have a discrete number of atoms. At the moment the smallest Bitcoin denomination or “Satoshi” is 0.00000001 Bitcoin or about a millionth of a penny. That’s pretty small, but with a software change it can become smaller. In that way, Bitcoin, subject only to math is MORE divisible than silver or gold, and far easier. As numbers all Bitcoin are exactly the same.

 

4. Bitcoin has intrinsic value. Actually, the problem is NOTHING has “intrinsic” value. Things have value only because they are useful to yourself personally or because someone else wants them. Water is valuable on a desert island and gold is worthless. In fact, gold has few uses and is fundamentally a rock we dig up from one hole to bury in another, yet we say it has “intrinsic” value – which is good as Number 4 said it had to be unrelated to any other object, i.e. useless. Bitcoin and Gold are certainly useless. Like gold, Bitcoin may not have “Intrinsic value” but it DOES have intrinsic cost, that is, the cost in time and energy it took to mine it. Like gold, Bitcoin has a cost to mine measurable in BTU’s. As nothing has value outside of human action, you can’t say the electric cost in dollars is a price-floor, but suggests a floor, and that would be equally true of gold, silver, copper, etc. In fact, Bitcoin is more rare than Rhodium: we mine rare metals at 2%/year while the number of Bitcoins stops at 22 Million. Strangely, due to math, computer digits are made harder to get and have than real things.

 

5. Bitcoin is a unit of account. As a psychological effect, it’s difficult to quantify. Which comes first, the use of a thing, or its pricing? Neither, they grow together as one replaces another, side-by-side. This happened when gold replaced iron or salt or when bank notes replaced physical gold, or even when the U.S. moved from Pounds and Pence to Dollars and Cents. At first it was adopted by a few, but managed to get a critical mass, accepted, and eventually adopted by the population and entirely forgotten. At the moment Bitcoin enthusiasts do in fact mentally price things in Bitcoins, especially on exchanges where cross-crypto prices are marked vs BTC. Some never use their home currency at all, living entirely according to crypto-prices until home conversion at the moment of sale, or as hundreds or thousands of businesses are now accepting cryptocurrencies, even beyond. For them it is a unit of account the way Fahrenheit is a unit within the United States.

 

6. Bitcoin has the network effect. That is, it is widely accepted and publicly considered money. It’s in the news, has a wide following worldwide, and exchanges are signing up 40,000 new users a month. It’s accepted by thousands of vendors and can be used for purchases at Microsoft, Tesla, PayPal, Overstock, or with some work, Amazon. It’s translatable through point-of-sale vendor Square, and from many debit card providers such as Shift. At this point it is already very close to being money, i.e. a commonly accepted good. Note that without special arrangements none of these vendors will accept silver coins, nor price products in them. I expect if Mark Dice offered a candy bar, a silver bar, or a Bitcoin barcode, more people would pick the Bitcoin. In that way Bitcoin is more money than gold and silver are. You could say the same thing about Canadian Dollars or Thai Bhat: they’re respected currencies, but not accepted by everyone, everywhere. For that matter, neither are U.S. dollars.

Note what is not on the list: money is not a unit created or regulated by a central authority, although governments would like us to think so. In fact, no central authority is necessary or even desirable. For centuries the lack of monetary authority was historic fact, back with medieval markets through to private banks, until 1913, 1933, 1971, and the modern evolution into today’s near-total digital fiat. Besides the technical challenge, eliminating their overhead, oversight, control and corruption is the point of Bitcoin. And right now the government’s response to Bitcoin is a strange mixture of antipathy, ignorance, oppression, and opportunity. At $160 Billion it hardly merits the interest of a nation with a $500 Billion trade deficit, and that’s spread worldwide.

This leads into one of the spurious claims on Bitcoin: that it’s a refuge for drug smugglers and illegal activities. I assure you mathematically, that is not true. According to the U.N. the world drug trade is $435B, 4 times the total, and strictly theoretical value of Bitcoin, coins locked, lost, and all. Besides if you owned $160B coins, who would you transfer them to? You’re the only user. $435B/year can only be trafficked by major banks like as HSBC, who have paid public fines because money flows that large can’t be hidden. This is so well-known the U.N. suggested the drug-money flows may be one reason global banks were solvent in ‘08. Even $160B misrepresents Bitcoin because it had a 10-fold increase this year alone. So imagine $16B total market cap. That’s half the size of the yearly budget of Los Angeles, one city. Even that overstates it, because through most of its life it’s been around $250, so imagine a $4B market cap, the budget of West Virginia.

So you’re a drug dealer in illicit trades and you sell to your customers because all your buyers have Bitcoin accounts? Your pushers have street terminals? This doesn’t make sense. And remember as much as the price of Bitcoin has risen 40-fold, the number of participants has too. Even now, even with Coinbase, even with Dell and Overstock, even with BTC $10,000 almost no one has Bitcoin, even in N.Y.C. or S.F.. So who are these supposed illegal people with illegal activities that couldn’t fit any significant value?

That’s not to say illegal activities don’t happen, but it’s the other half of the spurious argument to say people don’t do illegal acts using cash, personal influence, offshore havens, international banks like Wells Fargo, or lately, Amazon Gift Cards and Tide Detergent. As long as there is crime, mediums of value will be used to pay for it. But comparing Bitcoin with a $16B market cap to the existing banking system which the U.N. openly declares is being supported by the transfer of illicit drug funds is insanity.

Let’s look at it another way: would you rather: a) transfer drugs using cash or secret bank records that can be erased or altered later or b) an public worldwide record of every transaction, where if one DEA bust could get your codes, they could be tracked backwards some distance through the buy chain? I thought so. Bitcoin is the LEAST best choice for illegal activities, and at the personal level where we’re being accused, it’s even worse than cash.

We showed that Bitcoin can be money, but we already have a monetary and financial system. What you’re talking about is building another system next to the existing one, and doubling the costs and confusions. That’s great as a mental exercise but why would anyone do that?

In a word: 2008.

It’s probably not an accident Bitcoin arrived immediately after the Global Financial Crisis. The technology to make it possible existed even on IRC chat boards, but human attention wasn’t focused on solving a new problem using computer software until the GFC captured the public imagination, and hackers started to say, “This stinks. This system is garbage. How do we fix this?” And with no loyalty to the past, but strictly on a present basis, built the best mousetrap. How do we know it’s a better mousetrap? Easy. If it isn’t noticeably better than the existing system, no one will bother and it will remain an interesting novelty stored in some basements, like Confederate Dollars and Chuck-e-Cheez tokens. To have any chance of succeeding, it has to work better, good enough to overcome the last most critical aspect money has: Inertia.

So given that Bitcoin is unfamiliar, less accepted, harder to use, costs real money to keep online, why does it keep gaining traction, and rising in price with increasing speed? No one would build a Bitcoin. Ever. No one would ever use a Bitcoin. Ever. It’s too much work and too much nuisance. Like any product, they would only use Bitcoin because it solves expensive problems confronting us each day. The only chance Bitcoin would have is if our present system failed us, and fails more every day. They, our present system-keepers, are the ones who are giving Bitcoin exponentially more value. They are the ones who could stop Bitcoin and shut it down by fixing the present, easy, familiar system. But they won’t.

Where has our present system gone wrong?

The criticisms of the existing monetary system are short but glaring. First, everyone is disturbed by the constant increase in quantity. And this is more than an offhand accusation. In 2007 the Fed had $750B in assets. In 2017 they have $4.7 Trillion, a 7-fold increase. Where did that money come from? Nowhere. They printed it up, digitally.

The TARP audit ultimately showed $23 trillion created. Nor was the distribution the same. Who received the money the Fed printed? Bondholders, Large Corporations, Hedge Funds and the like. Pa’s Diner? Not so much. So unlike Bitcoin, there not only was a sudden, secret, unapproved, unexpected, unaccountable increase in quantity, but little to no chance for the population to also “mine” some of these new “coins”. Which leads to this:

Near-perfect income disparity, with near-perfect distribution of new “coins” to those with access to the “development team”, and zero or even negative returns for those without inside access. Does this seem like a winning model you could sell to the public? Nor is this unique to the U.S.; Japan had long ago put such methods to use, and by 2017 the Bank of Japan owns a mind-bending 75% of Japanese ETFs:

So this unelected, unaccountable bank, which creates its coin from nothing without limit or restraint, now owns 75% of the actual hard labor, assets, indeed, the entire wealth HISTORY of Japan?

It took from the Edo Period in 1603 through Japan-takes-the-world 1980s until 2017 to create the wealth of Japan, and Kuroda only 6 years to buy it all? What madness is this?

Nor is Europe better. Mario Draghi has now printed so much money, he has run out of bonds to buy. This is in a Eurozone with a debt measuring Trillions, with $10 Trillion of that yielding negative rates. That’s a direct transfer from all savers to all debtors, and still the economy is sinking fast. Aside from how via these bonds, the ECB came to own all the houses, businesses, and governments of Europe in a few short years, does this sound like a business model you want to participate in?

So the volume of issuance is bad, and unfairness of who the coins are issued to is as bad as humanly possible, giving incredible advantages to issuers to transfer all wealth to themselves, either new or existing.

But if the currency is functional day-to-day, surely the issuance can be overlooked. Is it? Inflation is devilishly hard to measure, but here’s a chart of commodities:

CPI:

The US Dollar:

or vs Gold (/silver):

Does that look stable to you? And not that Bitcoin is stable, but at least Bitcoin goes UP at the same rate these charts are going DOWN. One store coupon declines in value at 4% a year, or may even start negative, while the other gives steady gains to loyal customers. Which business model would you prefer?

But that’s not all...

*  *  *

Part 3 tomorrow...

Precious Metal Futures" Trendline Frenzy: Are Gold, Silver, Platinum, and Copper About to Die?

Gold Futures (GC)

 

Gold futures found itself in dangerous waters during the 12/05 session as GC price action temporarily broke below 1,267 – a key support level from gold’s last two swing lows on 10/6 and 10/27.  After closing at 1,268.40, GC became the chart of the day, with price sitting just above support trendlines on both the short and long-term.  Having tread water in place by chopping around in a sideways price channel for the past two months, GC futures need to bounce immediately or may begin a lengthy plunge with a clear-cut downside drowning target of 1,215.

 

 

 

 

Silver Futures (SI)

 

Silver futures continued to sell-off for the 6th consecutive losing session; swiftly breaking down below two previous major swing lows at 16.444 (10/09) and 16.282 (08/07).  SI’s short-term technical profile has become very bearish, with silver futures floating around in ‘no man’s land’ without any meaningful support levels in sight.  While a small bounce may cool-off the current sell-off - and attempt to push ‘poor man’s gold’ prices back up into 16.50-17.00 - what’s more likely is that silver futures will gravitate towards their next major support levels.  If so, SI will be magnetically drawn down to 15.55 like Magneto lazily beckoning for a spoon. 

 

 

 

Platinum Futures (PL)

 

Platinum futures dropped for the third straight session, before finding support at the key trendline connecting the last two major swings at 895.40 (07/11) and of 906.50 (10/06).  The next few sessions will likely determine whether platinum bounces back up towards 960 and remains in a sideways price channel, or if it confirms the Super DMI™ bearish crossover and heads even lower to test long-term support at 895-905.  Price action will see a strong bounce at those levels, but a break below 895 means that 830-870 is where PL futures will be heading in early 2018.

 

 

 

 

Copper Futures (HG)

 

Dr. Copper’s technicals are the only thing we would dare think to possibly know better than Gundlach; well, maybe how to handle frustartion with a pathetically hollow fourth estate of mainstream media and maybe haircuts, but we digress and absolutely adore the art-loving Buffalo Bill suffering true Bond King.

Copper futures were simply obliterated, suffering their largest loss in a single session since 12/14/11.  If price continue to head lower over the course of this week, extremely strong support at 2.906 should provide a well-bid bounce back up towards 3.05.  If not, Copper may only delay an inevitable move down towards long-term support at 2.55 now that price has confirmed the Super DMI™ bearish crossover.

 

 

 

Check out Fibozachi.com to learn about modern technical analysis and trading indicators that actually work.

How "Ghost Collateral" And "Yin-Yang" Property Deals Will Collapse China"s Credit Bubble

One lesson from the 2007-08 crisis was that the vast majority of financial market participants, never mind the general public, were unfamiliar with subprime mortgages until the crisis was underway. Even now, we doubt many have much understanding of repo, the divergence between LIBOR and Fed Funds from 9 August 2007 and Eurodollar liquidity. In a similar way, when China’s bubble bursts, we doubt the majority will be that familiar with “ghost collateral” and “yin-yang” property contracts either.
 
A second lesson from the 2007-08 crisis was that as the value of the collateral underpinning the vast amount of leverage declined, the surge in margin calls led to cascading waves of selling in a downward spiral.

A third lesson was that the practice of re-hypothecating the same subprime mortgage bonds more than once, meant collateral supporting the most vulnerable part of the credit bubble was non-existent. It only became apparent with the falling prices and margin calls. Few people realised the bull market was built on such flimsy foundations, as long as prices kept rising.

A fourth lesson was that in order for the bubble to reach truly epic proportions, key financial institutions, especially banks, needed to conduct themselves in a negligent fashion and totally ignore increasing risks.

Each of these warning signs from the 2007-08 crisis exists in China’s property market now – and other parts of its financial system - bar one…falling prices leading to cascading waves of selling. However, as we’ll explain, we think it’s only a matter of months away now.

We should note that our thesis that China’s bubble would eventually be undermined by a “black hole” of insufficient collateral is one that we have been developing for several years. What we came to realise is that insufficient collateral is nothing more than normal business practice in the Chinese economy. It doesn’t matter whether it’s related to commodity-backed loans, property speculation or managing redemptions in the Wealth Management Products (WMPs) sector.

The first sign of this practice to received worldwide attention came to light in 2014 with the collateral fraud at China’s third largest port, Qingdao, which spreading to another port, Penglai, before it suddenly got covered up stopped. Numerous borrowers were found to have pledged the same copper and steel inventory as collateral to obtain funding from various banks, including state-owned Citic Resources, as well as Citi, Standard Chartered and others.

Not long after the scandal emerged, media attention began to wane, as commentators either assumed it was fixed or were distracted by other issues. However, it wasn’t fixed and we had a shocking reminder last month with the first major publicly announced loss. ED&F Man took an $80m hit after acting as a broker between Australia’s ANZ Bank and two Hong Kong-based trading companies in a sale-and-repurchase financing deal. The trade was backed by storage receipts for about $300 million of nickel stored in Glencore-owned warehouses in Asia. The problem was that the warehouse receipts were forged. As we said.

What is surprising is that it has taken over three years for the first serious hit from China"s "ghost collateral" to emerge. Or perhaps not: in a time of generally rising prices, few if any traders actually bother to check if their pledged collateral ever exists. The problem emerges when prices decline, which courtesy of China"s bubble machine, has so far not been an issue.

In June 2017, we discussed an article, “Ghost collateral’ haunts loans across China’s debt-laden banking system”, by our favourite Reuters reporter and forensic investigator of China’s collateral black hole, Engen Tham. Here are a few soundbites from Tham’s impressive piece.

One lawyer said he discovered that the same pile of steel was used to secure loans from 10 different lenders.

Most of the bankers said that kickbacks were prevalent, with loan officers turning a blind eye to the quality of collateral and knowingly accepting dubious and even fraudulent documents. Two of the bankers said they themselves had taken bribes to smooth the approval of loans.

Overall, 23 of the 30 bankers described the existence of ghost collateral as a serious problem and expected more instances to emerge as the Chinese economy slows. The bankers interviewed come from 13 banks in China, including some of the nation’s biggest lenders.

…fraudulent collateral is “a huge issue,” said Violet Ho, senior managing director and co-head of Greater China Investigations and Disputes Practice at Kroll, which conducts corporate investigations on the mainland. “Often you also see that the paperwork around collateral may be dodgy, and the bank loan officer knows, the intermediary knows, and the goods owner knows – so it’s essentially a Ponzi scheme.”

More than six months later and Egen Tham is back with a “special report” on loan fraud and missing collateral in China’s property market, “Hidden peril awaits China"s banks as property binge fuels mortgage fraud frenzy”. We strongly recommend the article as Tham goes into forensic detail as he examines specific legal disputes which act as a window on the broader Chinese property market.

Here is our summary.

Reuters discovered an epidemic of mortgage fraud in China’s property market from extensive research and interviews with buyers, sellers, real estate agents, loan agents (see below), bankers and lawyers from three major Chinese cities and four smaller ones.

Buyers habitually overvalue the cost of the house or property they are buying so they can borrow more funds which are typically channelled into the property market, e.g. buyers who have insufficient down payment or income. A mortgage banker at Shanghai Pudong Development Bank estimated that 20-30% of his clients borrowed the down payment from a third party.

Small banks and loan companies do not have the resources to monitor if money is borrowed to finance down payments on property deals. Reuters notes that short-term household loans increased by 243% to 1.6 trillion yuan in the first ten months of 2017.

There are up to three contacts for an individual property transaction – the legitimate one, one for the bank providing the loan which overstates the property’s value and one for the tax authorities. These are widely known as “yin-yang” contracts in which real and fake agreements operate side-by-side.

In these re-packaged loan arrangements, all parties, including the bank and the seller, can be complicit in the fraud. Tham provides detailed examples. Since “everybody is doing it”, the crimes go unpunished, even when the guilty admit them in court documents regarding related claims.

Reuters reports that it interviewed twelve estate agents who admitted to helping clients commit mortgage fraud. One salesperson at the E-House China agency said that about 50% of his clients engaged in mortgage fraud. Another real estate agent estimated that about 60% of Shanghai property deals involve “some kind of re-packaging”.

A separate industry of loan agents has evolved which help property buyers to fraudulently secure mortgage loans. Real estate agents, and the banks themselves, introduce borrowers to the loan agents which keeps the criminal activity at “arm’s length”. 

While many western websites are blocked by the Chinese authorities, discussions about securing a fraudulent mortgage, the price of fake documents and adverts from loan agents are prevalent on social media.

The motivation for mortgage fraud is the fear of missing out in the great Chinese property bubble. While official data showed that house prices rose 12.4% in 2016 (fastest since 2011), this understates reality. The state-controlled Chinese Academy of Social Sciences estimates that prices rose by an average of 42% in 33 major cities.

Reuters noted that property market insiders “see little prospects” of an end to mortgage fraud, even though the Chinese regulators have asked banks to stop over-valuations and “yin-yang” contracts. Even when evidence of fraud is specifically shown to a bank, it is likely to be ignored.  

To add some colour to our prose, here are a handful of soundbites from Tham’s article.

Almost all contracts for the sale of existing property in China have some “yin-yang” element, according to Denny Jiang, a former banker and recent home buyer in Beijing.

A Hong Kong property investor surnamed Fu, who declined to give his full name because he was admitting criminal behavior, told Reuters that 20,000 yuan (about $3,000) in a traditional red gift envelope was enough for a valuation company to inflate the price of the apartment he wanted to buy in Shenzhen by 40 percent. That increased the amount the bank was prepared to lend him by 1.26 million yuan.

While property prices in China continue to rise, mortgage fraud remains largely a hidden danger, much as subprime loans in the United States remained mostly out of sight ahead of the 2008 global financial crisis. The fear is that in a property correction, fraudulent mortgages would unravel, accelerating a collapse of housing prices in the world’s second biggest economy. This, in turn, would imperil China’s debt-laden financial system.

“It seems banks don’t consider the issue a serious one.”

We think the last two comments are particularly poignant, harking back to some of the key themes of the 2007-08 crisis. As we noted above, the one thing missing from China’s bubble is falling prices leading to cascading selling which exposes the “ghost collateral” in the financial system. As this chart from Bloomberg shows, the month-on-month growth in Chinese house prices has slowed dramatically from the heady levels of 2016, as Chinese authorities have increasingly tried to cool the bubble.

“Houses are for living in, not for speculation” as Xi Jinping stated at the recent Party Congress. Even though property sales have been slowing, The Standard reported the state’s CCTV said that the property sector’s three regulators, the PBoC, the Ministry of Housing and Urban-Rural Development and the Ministry of Land and Resources, remained committed to stepping up financial regulation and cracking down on speculation after a joint meeting in Wuhan last month.

The regulators said China would prevent funds from being illegally channelled into the property market, and ensure capital allocation between real estate and other industries was balanced. The three central government entities also told provinces to stick to their tightening measures and be consistent in policy, warning against lax regulation that could lead to big fluctuations in the market and a build-up in financial risks.

"(We) must not tolerate any thinking that we can sit back and relax," the regulators said, according to CCTV. China will also improve its management of the land market and prevent cases of high land prices pushing up property prices.

In Deutsche Bank’s latest China macro presentation, “Risks to watch in next six months, part IV”, the bank explained why property prices will cool further and could be declining on a year-on-year basis by the middle of next year (the month-on-month decline would likely be apparent in early 2018). DB’s rationale is as follows. Leverage in the financial sector is slowing rapidly.

Financial deleveraging is a key factor behind rising interest rates…

…which will deflate China’s property bubble during 2018.

DB believes that unless the Chinese authorities rein back their deleveraging policies, H2 2018 could see the market slow rapidly…

…which assumes China’s central planners can fine tune a deflating bubble once it starts. We have our doubts.

Doc Copper breakdown important global message?

Ole Doc Copper has performed very well over the past 2-years, as it has rallied 50%. Maybe the rally has been sent a positive message about the worlds macro picture? Could have and maybe stocks liked it.

Below look at the price action of Doc Copper over the past 5-years and why price action of late might be something one might not want to hide from–

CLICK ON CHART TO ENLARGE

The 24-month counter-trend rally took Doc Copper to test 5-year falling resistance at (1), where it attempted three times to breakout. While attempting to breakout, Doc Copper created several bearish wicks (bearish reversal patterns) at (1).

The rally pushed momentum to the highest levels since the 2011 peak of late, which looks to be turning lower.

Doc Copper this week, could be breaking 6-month rising support at (2).

Time will tell if ole Doc Copper is sending an important global macro message to stocks and about global inflation or lack of. Stick your head in the sand and ignore the message from Doc Copper? I am not at this time.

 

Chart pattern analysis with brief commentary:   

There is a ton of news and opinions about markets and stocks that make the decision-making process more difficult than it needs to be.    

I believe the Power of the chart Pattern provides all you need to see what is taking place in an asset and determine the action to take.  

This approach has worked well for me and our clients and I encourage you to test it for yourself. 

 

Send an email if you would like to see sample research and take me up on a trial of our Premium or Weekly Research where I provide actionable alerts on breakouts and reversals in broad market indices, sectors, commodities, the miners and select individual stocks 

 

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"When To Worry?": How Long After The Curve Inverts Does The Recession Begin

The recent (bear) flattening of the US yield curve to levels not seen since before the GFC, a move which has only accelerated in recent weeks as the stock market hit all time highs, has prompted some to question the strength of the US economic cycle, and others to ask outright how long before the curve inverts, signaling an imminent recession. Here, as Citi"s Jeremy Hale notes, just as "Dr. Copper" can sometimes be viewed as a stock market precursor, so "Professor Curve" (particularly when inverted or aggressively flattening) can be viewed as a signal of that policy is too restrictive relative to economic fundamentals (especially when using term premium suggests the curve should already be inverted). That said, during an expansion it’s generally normal for the curve to flatten, as the economy expands and the output gap closes, as shown in the chart below. This can be attributed to expectation of a higher Fed funds rate, but also a lower term premium, or more ominously, an inability to pass through inflation to the broader economy, leading to tighter financial conditions which ultimately manifest in an economic contraction.

Putting the recent 2s10s flattening in context (blue line on chart above), assuming this cycle started at the December 2013 steepness of 264bps, the curve has flattened for the past 60 months. On average, historic flattening cycles last for 2-2.5 years and flatten ~270bps from peak to trough. As Citi notes, we have flattened three quarters on the way there, or roughly 204bps so far in this cycle, therefore in comparison to previous episodes; perhaps this flattening dynamic is growing grey hairs... but it’s certainly not finished yet.

Indeed, if history repeats, then another 67 bps flattening is implied before we see an inversion of the curve. And while this cycle of curve flattening has been particularly slow, assuming a runrate of 40bps of flattening per year, then we could see a flat curve within 18 months (Figure 3, left). So "should we be worried?" Citi asks and answers that, rightly or wrongly, market participants with grey hairs would preach that all is well until the curve begins to invert. Ah yes, but that"s not the full story, as Citi explains below:

Sometimes inversion provides a timely signal for the economic cycle a la 2000, where Professor Curve predicted almost the ding-dong high in the SPX. However the 2006 episode of inversion dished up 7 months of pain for equity bears, with 18% further upside for the SPX. Ditto for the 1989 episode where equities continued to rally 22% into the 1990 recession (Figure 3, RHS). For now, we’re comfortable with the flattening dynamic with regards to other markets but would become increasingly cautious as the curve approaches zero.

In other words, once the curve inverts, it could either mark the top-tick of the market right there... or leave up to 22% more in equity upside before stocks finally crash.

Citi"s optimism - for now - aside, one notable distinction about the current flattening is that, unlike much of the curve move in 2016, this one has been driven by the front end, i.e. a bear flattening.  The front end of the US curve has significantly re-priced since September with the extension of the debt ceiling and the realization that fiscal easing could be achieved by the Trump administration.

Also worth noting is that while the short end has been driving curvature, the long end has been relatively rangebound, at least over the past year. What Citi finds particularly interesting is that even with ‘impending’ fiscal expansion in the US and balance sheet normalization by the Fed, term premia are actually still negative and suggest that the nominal 10y UST should trade closer to ~1.6% if the priced in forward short rate was at end pre-Election levels (Figure 6, LHS). This would suggest that there is, of course, a risk that the unusually low term premium - pushed to near record low levels by foreign central banks QE and NIRP, herding investors into long-term US duration - could suddenly rise; of note, perceived inflation risk could reverse its course quickly if inflation
suddenly trended up.

Some Fed estimates suggest that term premium is ~0.9% lower than it would be without the Fed’s large securities holdings, and that this term premium effect will gradually diminish with the reduction of the Fed’s balance sheet. But the Fed’s normalization has been well telegraphed; therefore the market has had the opportunity to anticipate this for several months (this goes back to another point made by Citi"s Matt King that the market has lost the ability to discount the future). In fact, the central bank depresses the term premium by limiting the uncertainty surrounding monetary policy. In short, Citi is skeptical of the material  impact that BSA may have on nominal yields given a relatively hawkish Fed. Furthermore, as the Fed continuing to tighten, it is possible the US economy is ‘locking in’ any gains that may be passed through to CPI. It is worth noting that in the last two cycles, US firms (and others) have had trouble - if not found it impossible - passing wage costs through to prices.

So even if a curve inversion does not spell imminent recession, what is next for the (shape of the) curve? Well, more of the same flattening it appears, as the curve takes more aggressive steps to flatten.

As Hale explains, the term premia and the forward curve suggests further flattening ahead (Figure 10 bottom LHS and top RHS). It’s also worth noting that in the past throughout Fed hiking cycles, the curve flattens on average between 100-125bps (Figure 10  bottom RHS), we’re currently around half way through on that basis assuming the Citi Fed call is right. But relative to other cycles at this stage, perhaps we have moved far enough for the time being. Citi"s fair value model using ACM term premium, the breakeven curve and a proxy for the r* also suggest flattening is close to fair value for now (Figure 10 top LHS).

But more medium term as the Fed keeps tightening, the curve will likely continue to flatten, and may even begin to bull flatten, should inflation expectations fall further. Ironically, Citi concludes, if the Fed wants higher long-term rates, and with them a steeper yield curve, it may need to hold back on further interest rate hikes until inflation surpasses the target/ backward driven inflation expectations rise.

Until then, however, expect people to keep talking about the flattening yield curve.