The #BitcoinBreakdown: Before You Buy, More Caveats

First Appearing on HedgeAccordingly.com

Fifth in a series.  Part 1, Part 2, Part 3, Part 4, Part 5

By @sellputs

Let us regard the wonders of technology & innovation: Suddenly, we now have multiple easy ways to lose money betting on bitcoin. Giddyup!

With incredible speed, from your laptop or even your smartphone and without even thinking about it, you can open up a new account, inject real U.S. dollars into it, use that to buy a teensy piece of your favorite cryptocurrency, and begin surfing the bitcoin wave. Or begin getting crushed by that wave, depending on your timing, smarts and luck.

This occurs to me on a recent Thursday night, as I visit an old friend in Brooklyn and bring along Big Guy, a college pal who stands 6-feet-4 (“and a half,” he feels it necessary to point out).  The Big Guy and I had been hanging out at the famed Waverly Inn in the West Village in Manhattan, where I had the vodka martini, marked down on special: just $28, down from $30 list.

This next point has nothing to do with bitcoin, okay? I gotta say: Anybody who regularly spends 30 bucks on a martini is a P.T. Barnum-scale sucker.  What a waste of money.  Waste it, instead, on something really irresponsible. . . . like bitcoin.

Anyway, we’re standing around a table in my friend’s apartment in Brooklyn, and Big Guy is taking swigs from a bottle of Blue Point Winter Ale and staring into the screen of his smartphone, as if mesmerized by some new videogame. Instead, he is tracking his own cryptocurrency trades.

“Uh oh, Ethereum is flash-crashing,” he says. He had gotten got into Ethereum (ETH), a newer “altcoin” alternative to bitcoin, a few days earlier at $620, watching it rise to $740 in a day or two and holding on, only to see it crash instantly down to $650 just this moment.  Should he sell?

Guy resists the urge and doubles up on his bet, adding to his ETH holdings (as well as Litecoin, LTC) “to lower my cost basis and scalp the bounce-back from the flash crash,” as he describes it later.  By 3 a.m. that same night, Ethereum had re-inflated to rise back up even higher, to $850. Whew.

Big Guy had put $10,000 into a new account he opened at Coinbase, a digital exchange akin to the New York Stock Exchange (except it is unregulated and carries no particular guarantees, far as I can see).  He had bet his stake all on bitcoin, pulling out after a 53% gain in a week, after commissions.

Guy opened up a second account, this one on GDAX, a 24/7, online platform in the rather unregulated, Wild West of crypto (it is owned by Coinbase). GDAX offers FDIC guarantees up to $250,000 (what happens to your money as a result of your trades is on you). On GDAX, he bet his bitcoin profits on the two lesser lights, ETH and LTC.  He says he can take profits out of Litecoin in only minutes, while transferring money out of bitcoin would take several hours. (LTC is lighter-traded than the binge-fueled bitcoin.)

GDAX charges him 25 basis points (0.25% of the total value of the trade) for “taking markets,” that is, buying coin shares on offer, and no fee at all for “making markets,” or selling on the platform.  Coinbase’s buying fee, at 1.5%, is fives times as much that of GDAX. A few days after he sat out the mini-flash-crash, Guy transfers some LTC from his GDAX account to another coin platform, Binance, where he wants to sell LTC and spread the proceeds among various coins trading below $5 apiece.

And a day or two after that, Big Guy is beaten down: He was up 75% and lost most of it all when he panicked and fled ETH and LTC at the bottom of a later plunge. Too fidgety. Easy come, easy go. He’s back in Ripple, though, and it has been “outperforming.”

Yes, the Big Guy admits, he does worry that in a flash crash or especially high trading volume, he may not be able to minimize his losses and take out cash.  In cryptocurrency trading, the bigger question than whether to sell may be: Can you sell? 

Coinbase limits how much money you can pull out of your account after you sell your crypto and convert the proceeds back to U.S dollars or whichever “real” currency you desire. So, in the event of a crash or some sudden, sharp de-valuation in bitcoins, your ability to act fast and sell your coins might be hampered, and selling your coins could be all but impossible.

Think of it as a football packed with cheering buyers, most of them unaware that there’s only one exit—and it is the size of a doggy door.  Buyer beware.  Puppies, too.

Next up: The high fees for buying bitcoin.

100 Billion Reasons To Have Non-Reportable Assets

Authored by Simon Black via SovereignMan.com,

In early March 1938 in a dusty corner of the Arabian desert, Max Steineke finally had the breakthrough he was hoping for.

Steineke was the chief geologist for the California Arabian Standard Oil Company (CASOC), a venture owned by what we know today as Chevron.

And he hadn’t had a lot of success despite years of effort.

Steinke was convinced that massive oil reserves were beneath the sands. He just couldn’t find any.

His prized oil well, what was called Dammam #7, had been riddled with mishaps, accidents, and delays, and it was costing the company a LOT of money.

Steinke was about to be shut down when, finally, on March 4, the well started gushing. And Saudi Arabia was never the same.

Today oil constitutes more than half of Saudi Arabia’s GDP and more than 90% of government revenue… and it is the reason why Saudi Arabia is one of the world’s richest nations as measured by per-capita GDP.

But all that success also comes with risk: what happens when the wells run dry? Or when the oil price falls?

That’s what they’re dealing with now.

Saudi Arabia has been in and out of recession over the past few years due to the steep decline in oil prices. And the government is desperate to raise revenue.

Last year the Saudi government announced “Vision 2030,” a long-term plan to diversify its economy and reduce dependence on oil revenue.

The plan includes developments like a new beach resort on the Red Sea where women will be allowed to wear bikinis. This is pretty forward thinking, folks.

The government also announced that it will sell a portion of the national oil company, Saudi Aramco, through an IPO on a major stock exchange– a move they believe will generate $100 billion for the government.

But none of these options fixes the short-term problem. Saudi Arabia needs cash. Now.

So over the past few weeks they’ve found their source: theft.

Under the guise of a ‘corruption crackdown’, the government of Saudi Arabia has arrested hundreds of its wealthiest, most prominent citizens, and frozen more than 1700 bank accounts.

The government claims that these men illegally acquired their wealth through graft and corruption.

Now, to be fair, it’s true that there’s an enormous amount of corruption in Saudi Arabia.

I lived in Riyadh years ago when I was a young intelligence officer, and the corruption was obvious from Day 1.

For example, I remember mid-level Saudi army officers explaining how they would accept bribes and kickbacks to award small contracts to local suppliers.

These were military commanders who were essentially stealing from their own units.

For us it was unthinkable. But for them it was normal. They discussed it openly with each other, as if they were trading tips on how to steal even more.

Saudi billionaire Prince al Waleed (one of the people who has been arrested) also used to speak quite candidly about how he made his initial fortune through bribes and kickbacks.

So it’s clear that a lot of people in Saudi Arabia have made money in illicit ways.

It does strike me as a farce, though, to see extremely corrupt bureaucrats and politicians arresting corrupt businessmen… and then confining them to the very swanky Ritz Carlton hotel in Riyadh.

The timing is also suspect– the Saudi government needs the money and cannot afford to wait for their long-term plans to generate income.

They’ve already started borrowing pretty heavily, issuing close to $40 billion of debt in a single year– that’s a big chunk for a country with a $650 billion GDP.

But they know they can’t keep borrowing forever… hence the ‘anti-corruption purge.’

They’re now telling their captives that they’ll be free to go if they ‘voluntarily donate’ 70% of their wealth to the government.

Estimates vary for the amount of money the government will bring in through this theft; the lowest amount I’ve seen is $100 billion (again, an enormous sum in Saudi Arabia).

The Wall Street Journal reported that the Saudi government is targeting as much as $800 billion… an amount that’s larger than the entire Saudi economy.

To put that number in context, it would be like the US government seizing $22+ trillion of Americans’ wealth– more than the value of every company listed on the New York Stock Exchange combined.

All of this, naturally, is taking place without any trial or due process. They’re just seizing and freezing assets.

If you’re thinking, “Thank goodness I live in a free country where that would never happen,” think again.

This is really no different than Civil Asset Forfeiture in the Land of the Free, the legal framework where countless federal, state, and local agencies have the authority to seize and freeze every asset you own without even so much as charging you with a crime.

(They can even take your kids away!)

I think there’s a pretty big lesson here: desperate governments almost invariably resort to stealing from their own citizens.

And that’s why one step in a Plan B is to have some non-reportable assets.

The government knows about every local bank account you’ve opened. They know what’s in your domestic brokerage account. Or what real estate you own.

And they can seize it all in a heartbeat.

So it’s a good idea to have a few assets that they don’t know about… assets that you’re not legally required to tell them about– like an offshore bank account.

This includes things like physical cash, precious metals, and yes, cryptocurrency.

You won’t be worse off for having some non-reportable assets– especially cash.

Think about it– it won’t make a difference if there’s $20,000 in your bank account or in your safe. It’s not like the banks pay interest anyhow.

But if the worst happens, this emergency savings could be a life-saver.

Do you have a Plan B?

The "Junkie" Market Is Back

Via Dana Lyons" Tumblr,

The past few days have seen a reversal from substantial net New lows to substantial net New highs – a condition that has preceded poor performance in the past.

We’ve posted several pieces in the past regarding what we’ve termed “Junkie Markets” – junctures characterized by a substantial number of both New 52-Week Highs and New 52-Week Lows.

Such conditions represent a key component of various and notorious market warning signals, such as the Hindenburg Omen and others. As the ominous sounding names would imply, the historical stock market performance following such signals has been poor. We have found the same to be true with respect to our “Junkie Markets”. Today’s Chart Of The Day deals with a new variation of the Junkie Market.

Specifically, we have seen an unusual development over the past 2 days. On Wednesday, the number of net New Lows on the NYSE, i.e., New Lows minus New Highs, exceeded 2% of all exchange issues, a fairly large amount. The very next day, yesterday, conditions completely reversed as we saw net New NYSE Highs, i.e. New Highs minus New Lows, actually account for more than 2% of all issues. If you think that sounds strange, you’re correct. It is just the 15th such occurrence since the start of our data in 1970.

Here are the dates of these reversals:

3/25/1970
4/14/1972
7/11/1974
10/20/1977
1/2/2001
4/22/2004
5/11/2004
4/18/2006
6/28/2007
7/19/2007
9/19/2008
5/30/2013
10/10/2013
1/15/2015
11/16/2017

What would cause such a phenomenon? Well, the only thing we can offer is that a Junkie Market, i.e., one with lots of New Highs and Lows, is really the only type of market in which such a reversal is even possible. Thus, it should not be surprising that the S&P 500’s aggregate performance going forward following these precedents has been less than stellar (incidentally, aggregate performance is similar following the 19 occasions of the opposite reversals, i.e., >2% Net New Highs to >2% Net New Lows).

With median returns negative from 1 week to 6 months, this appears to be another version of the Junkie Market that, for whatever reason, has not been kind to stocks going forward. Obviously, the presence of signals near cyclical peaks in the early 1970’s as well as 2001 and 2007-2008 do not help the aggregate returns (average returns are even worse than median).

Now, not all signals have occurred at the beginning of cyclical bear markets. However, as the chart shows, one interesting observation is that all of the occurrences have occurred during secular bear markets (that is, of course, if one accepts that we are still within the confines of the post-2000 secular bear market, as is our view – that is a topic for another time, though). The point is that, if true, the ramifications may reinforce the negative tendencies associated with Junkie Markets.

The bottom line for now is that, while it is certainly possible that stocks can continue higher in the interim, this condition of elevated New Highs and New Lows is a potential unhealthy headwind in the longer-term.

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If you’re interested in the “all-access” version of our charts and research, please check out The Lyons Share. Find out what we’re investing in, when we’re getting in – and when we’re getting out. Considering that we may well be entering an investment environment tailor made for our active, risk-managed approach, there has never been a better time to reap the benefits of this service. Thanks for reading!

Volatility Makes A Comeback

Authored by James Rickards via The Daily Reckoning,

Volatility has languished near all-time lows for months on end. That’s about to change.

For almost a year, one of the most profitable trading strategies has been to sell volatility. Since the election of Donald Trump stocks have been a one-way bet. They almost always go up, and have hit record highs day after day. The strategy of selling volatility has been so profitable that promoters tout it to investors as a source of “steady, low-risk income.”

Nothing could be further from the truth.

Yes, sellers of volatility have made steady profits the past year. But the strategy is extremely risky and you could lose all of your profits in a single bad day.

Think of this strategy as betting your life’s savings on red at a roulette table. If the wheel comes up red, you double your money. But if you keep playing eventually the wheel will come up black and you’ll lose everything.

That’s what it’s like to sell volatility. It feels good for a while, but eventually a black swan appears like the black number on the roulette wheel, and the sellers get wiped out.

I focus on the shocks and unexpected events that others don’t see.

Right now looks like one of those highly favorable windows when the purchase of volatility is the right move. You could collect huge winnings as the short sellers scramble to cover their bets before they are wiped out completely.

Your correspondent (left) on the floor of the New York Stock Exchange with television anchor Lelde Smits, and Stephen “Sarge” Guilfoyle during a recent visit. Sarge is the director of NYSE floor operations and one of the savviest traders on the floor. He told me, “Jim, there’s no liquidity here; it left a long time ago. When markets turn, they won’t get any support from the floor.”

The chart below shows a 20-year history of volatility spikes. You can observe long periods of relatively low volatility such as 2004 to 2007, and 2013 to mid-2015, but these are inevitably followed by volatility super-spikes.

During these super-spikes the sellers of volatility are crushed, sometimes to the point of bankruptcy because they can’t cover their bets.

The period from mid-2015 to late 2016 saw some brief volatility spikes associated with the Chinese devaluation (August and December 2015), Brexit (June 23, 2016) and the election of Donald Trump (Nov. 8, 2016). But, none of these spikes reached the super-spike levels of 2008 – 2012.

In short, we have been on a volatility holiday. Volatility is historically low and has remained so for an unusually long period of time. The sellers of volatility have been collecting “steady income,” yet this is really just a winning streak at the volatility casino.

The wheel of fortune is about to turn and luck is about to run out for the sellers. It will soon be time for the buyers of volatility to collect their winnings, big time.

Here are the key volatility drivers we have considered:

Many analysts assume that the North Korean situation is less critical today because the rhetoric has recently toned down, and the North Korean dictator, Kim Jong Un, said that he would delay his plan to fire missiles at the U.S. Territory of Guam.

But, that’s false comfort. Kim’s statement of restraint on Guam was conditional on “good behavior” by the U.S. That was a reference to a previously planned joint military exercise of U.S. and South Korean forces running from Aug. 21 – 31, 2017. Kim’s idea of good behavior was if the U.S. called off the exercise.

That wasn’t happening.

The military exercise started as planned late Sunday. Now all bets are off. Kim could fire a missile at Guam, which the U.S. has already said it will shoot down.

Kim could also test a submarine-launched ballistic missile (SLBM) that could evade U.S. anti-missile defenses or be fired at close range at the U.S. west coast. Kim might test a new nuclear weapon; perhaps a miniaturized warhead that would be the right size to place in the warhead of his ICBM that can strike Los Angeles.

One or more of these provocations seems highly likely. The U.S. response will be firm and potentially aggressive. This would put the North Korean crisis back on the front burner, and send volatility soaring.

Another ticking time bomb for a volatility spike is Washington, DC dysfunction, and the potential double train wreck coming on Sept. 29. That’s the day the U.S. Treasury is estimated to run out of cash. It’s also the last day of the U.S. fiscal year; (technically the last day is Sept. 30, but that’s a Saturday this year so Sept. 29 is the last business day).

Congress has to pass two major pieces of legislation. One is a debt ceiling increase so the Treasury does not run out of money. The other is a continuing resolution so the government does not shut down.

Both bills could be stymied by conservatives who want to tie the legislation to issues such as funding for Trump’s wall, sanctuary cities, funding for planned parenthood, funding to bailout Obamacare and other hot button issues.

If the conservatives don’t get what they want, they won’t vote for the legislation. If conservatives do get what they want, moderates will bolt and not support the bills. Democrats are watching Republican infighting with glee and see no reason to help with their votes. The White House has already said that a “good” government shutdown may be desirable to help crystallize the policy debate.

If these two legislative fixes are not done by Sept. 29, we’re facing both a government shutdown, and the potential for a default on the U.S. debt. Time is short and my estimate is that one or both of these pieces of legislation will not be completed in time. This will certainly trigger a volatility spike and produce huge profits for investors who make the right moves now.

Other sources of volatility include a planned “Day of Rage” on Nov. 4 when alt-left and antifa activists plan major demonstrations in U.S. cities from coast-to-coast. Antifa are neo-fascists posing as antifascists; hence the name “antifa.” Based on past antifa actions in UC Berkeley and Middlebury College violence cannot be ruled out. This could be unsettling to markets and be another source of volatility.

Then there are the wild cards including a natural disaster such as a hurricane, which can threaten the U.S. eastern seaboard or Gulf coast this time of year. In fact, a potential Category 3 hurricane is bearing down on Texas’ Gulf coast right now. It could dump up to 30 inches of rain and cause great destruction in the area.

Hurricane Katrina struck at the very end of August in 2005 and Superstorm Sandy hit the Jersey Shore in October 2012. Both did enormous damage and unsettled markets for a time.

Other wild cards include domestic terror and cyber attacks.

Finally, we are entering an historically volatile time of year. Many of the greatest stock market crashes of all time have occurred in September or October including the Black Thursday (Oct. 24, 1929) and Black Tuesday (Oct. 29, 1929) crashes that started the Great Depression, and the Black Monday (Oct. 19, 1987) crash, in which the stock market fell 22.61% in a single day. From today’s levels, a 22.61% drop would mean a loss of 4,900 Dow points in a single day.

Don’t rule it out.

None of these scenarios are far-fetched or even unlikely. The war with North Korea is coming. Washington, DC dysfunction is a fact of life and we’ve had several government shutdowns in recent years. Social unrest is spreading and in the headlines every day. Hurricanes and terror attacks happen with some frequency.

It has been nine years since the last financial panic so a new one tomorrow should come as no surprise.

In short, the catalysts for a volatility spike are all in place. We could even get a record super-spike in volatility if several of these catalysts converge.

Investors who prepare now for this coming wave of market shocks stand to realize huge gains when volatility roars back to life after sleepwalking for months.

Internal Cracks Are Showing In The Market - Low Volume Highs

Via Dana Lyons Tumblr,

Stocks have recently witnessed an unprecedented cluster of new highs occurring on negative volume.

A number of stock bears have pointed to the supposed thin nature of the rally in justifying their skepticism. That is, the rally has been led by a relatively small number of stocks as opposed to broad participation. While we have seen anecdotes of such a condition, we can’t say that we fully subscribe to this concern. Factors such as the NYSE advance-decline line hitting new highs along with the various market cap indices, from small-caps to large-caps, also at new highs undermine the argument, in our view.

We will say that some of our proprietary breadth measures have not supported the recent rally. When such divergences have occurred in the past, stocks have eventually dropped, confirming the signals of our indicators. However, the timing of such a reckoning can be difficult. Outside of that condition, as we said, concerns about breadth have been mainly of an anecdotal nature.

Today’s Chart Of The Day is also best classified in the anecdotal category, though perhaps a little more alarming than some of the recent “warnings” that we’ve seen. It deals with a recent odd spate of new 52-week highs in the S&P 500 on days in which declining volume on the NYSE actually exceeded that of advancing volume. There have actually been 6 such new highs in the past 3 months.

If that doesn’t seem like a big deal, it is actually a record number of such days within a 3-month time period. In fact, it is double the previous record number of 3.

So, how much of a warning sign – if at all – is this recent phenomenon? Going back to 1965, there have been plenty of these occurrences, e.g., the latter 1990′s and 2013 that failed to lead to any negative consequences whatsoever. However, most of those were isolated events.

The recent cluster of these days is, again, unprecedented and may signal a bigger warning sign for the stock rally.

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If you want this “all-access” version of Dana"s charts and research, he invites you to check out his new site, The Lyons Share.

Art Cashin And "The Myth Of The Good Friday Market Crash"

For those looking toward the end of the week, today is "pro-forma" Wednesday, because this is a four day week as U.S. equity markets are closed for Good Friday. And, as Art Cashin writes in his overnight note, as "every year, the Good Friday close produces lots of erroneous theories about why we close. So, once again, we offer the explanation we wrote a few years back"

The Myth Of The Crash That Caused The Stock Market To Close On Good Friday – In the over five decades that I’ve been in Wall Street, each Easter season sees the re-blooming of an old – and erroneous – myth.

That myth contends that the NYSE opened on a Good Friday and the terrible Black Friday crash occurred. Thus, chastened and shaken, the Governors vowed never to open on a Good Friday again. It never happened.

Thanks to the nice folks in the NYSE archives we were able to establish a few facts. Records clearly show the NYSE closed on Good Friday as far back as 1864. Before 1864 records on the subject are a bit harder to find but there is high likelihood that the Exchange closed on Good Friday all the way back to 1793. (It was founded on May 17th, 1792 so Good Friday would have already passed that year.)

There was a famous and terrible Black Friday crash in Wall Street but it was primarily in the gold market. It came about when the “corner” on gold that Jay Gould and Jim Fisk had constructed (with some help from President Grant’s brother-in-law), collapsed. That occurred on September 24th, 1869, a little late in the year for Good Friday. You will also note from the search of the records that the NYSE was closing on Good Friday at least five years earlier and probably, much, much longer.

Lastly, for some unexplained reason, the NYSE stayed open on three Good Fridays. On April 8, 1898, the Dow closed down a half point. That’s hardly a crash. On the other two, April 13th, 1906 (a Friday the 13th) and March 29th, 1907, the Dow actually rose.

The Forgotten Path to Prosperity

Authored by Michael Lebowitz via 720Global,

“The record of history is absolutely crystal clear. There is no alternative way so far discovered of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system.”  - Milton Friedman

Whether one thinks of a market as barter, a grocery store, internet commerce or the New York Stock Exchange, the concepts behind each of them are identical.  In all of these marketplaces, people have resources which they are willing to give up in order to gain something else they deem as more valuable.

If I own a coop full of chickens that produces two dozen eggs every week, then I am not likely to pay for eggs in the grocery store.  More likely, a grocer may be willing to buy my eggs for re-sale to his customers.  If my portfolio is over-weighted with technology stocks, then I am less likely to seek new technology stocks to own.  If I need money to pay for my daughter’s college tuition, then I may need to work harder and/or sell some of my assets in order to meet the obligation. This simple set of examples is intended to reflect the decision-making human beings face when considering resource allocation. In the 720 Global philosophy statement we put it this way:

• Human beings have desires and those desires drive decision-making. Given the desire and the means or ability to fulfill those desires, they will do so.  This results in demand.


• At the same time, in order to fulfill one’s desires, human beings will undertake activities that give them the means to fulfill their desires.  This results in supply.


• When human beings interact in a manner that allows their desires and their means to intersect, markets are created.

To emphasize the important linkage between resource allocation, economic success and the role of markets, a basic review of the terms scarcity and prosperity is important:

• Scarcity is defined as a deficiency in quantity or number compared with demand. It is a universal, natural condition whereby resources such as time, labor and material wealth are limited. In a world where desires are, by nature, unlimited, people are required to make prudent decisions about the use of limited resources.

• Prosperity is defined as the condition of being successful or thriving; economic well-being. It is a manufactured condition whereby the economic well-being of a person, community or nation is determined by the millions of choices citizens and government leaders make every day.  Prudent decisions regarding the use of our limited resources produce prosperity.

In the opening quote, the free enterprise system to which Milton Friedman refers is the system whereby people are free to engage in a vocation of their choice as a means of fulfilling their desires by producing something others need or want. Economic value, the basis for free market exchange, is subjective.  What has great value to one person may be of little value to another. Because anything a person could desire is to one degree or another scarce, each of us must prioritize our values by our individual preferences and means.  This not only applies to purchases and consumption but, just as important, how much we produce and how we spend our time.

When people are freely allowed to come together and cooperate in pursuit of their own self-interests, everyone benefits. The fewer needless restrictions imposed on a society, the more the individuals in that society are incentivized to innovate and produce as a means of satisfying their desires. This is how human beings deal with scarcity. Given our infinite desires and the natural limitations of time, energy and capital, markets determine how we navigate these exchanges.

From Scarcity to Plenty

According to Adam Smith, “If men work together and cooperate, they can combine their land, labor and capital to greatly multiply their ability to produce even greater and more complex things.”

Although evident in many ways, the power of Adam Smith’s observation is highly apparent in the technology and innovation that drove the industrial revolution and mass production.  The impact of mass production is seen not only in the technology and specialization of tasks, but also in its effect on prices. When goods are mass produced, the increased quantity of goods and lower costs of production drive down prices, which in turn makes them affordable to even more people.  Increasing productive capacity and deflating the cost of production is one of the primary reasons that western civilization so successfully fought scarcity and experienced prosperity.

Law and Liberty

In contemplating how markets allow humans to meet their most basic needs and desires, it is important to discern the mechanisms that have allowed the United States and western civilization in general to be so prosperous. Some nations deprived of resources are prosperous, while others, rich in resources, suffer from acute scarcity. Therefore, one must look to the degree of freedom in markets to determine why scarcity is more problematic in some countries and societies than others.

Law and liberty set the context for how markets function.  The United States is a republic that operates under the rule of law.  The rights and laws as originally established by the Declaration of Independence and U.S. Constitution are the principles of right and wrong by which citizens and the government must abide.  Among these, and vital to the engine of wealth creation, is the right to private ownership of property. Through this, a citizen owns what he or she produces or what they are paid by an employer for their production. As originally constructed and put forth in the founding documents, Americans are protected against unwanted intrusions. Simply put, one cannot take what is rightfully owned by another. In all of the aforementioned documents it is established that the government’s primary purpose is the defense of those rights.  Those documents make it perfectly clear that the unalienable rights bestowed upon all citizens are primarily intended as protections against governmental abuse.

The rights and protections decreed are not just about right and wrong, as they thoughtfully serve as the bedrock for efficient markets and importantly engender the incentives that drive productive work in America.  The ability to fulfill desires in a vocation of one’s choosing inspires individuals to work, save, invest and consume. In a word, it is the path to contentment.  These incentives compel men and women to deliver goods and services as efficiently as possible.  An individual’s productive effort not only renders the resources by which one can meet their own needs and desires, but taken in aggregate, it propels the wealth of the entire populace.

Interestingly, despite simple logic, modern central bankers try to convince the world that deflation is evil. They preach that they must intervene to stoke inflation at all cost for the good of society. The truth of the matter is that deflation is a beneficial by-product of innovation and productivity gains. Said differently, the incentives that inspire work and creative ingenuity produce prosperity and work against scarcity.

Productive deflation, which reduces scarcity as described above, benefits a society.  It especially benefits those at the bottom of the economic ladder as the issue of scarcity is a more profound problem for those with less. So why does modern society give central bankers the benefit of the doubt when they undertake such measures as debauching the currency in efforts to incite inflation?

Summary

The prosperity of a nation and its people comes about through the availability of goods and services to more people. Free markets, upheld by the rule of law, incentivize people to be productive through work and acquire the means to fulfill their desires. It is in this elegant yet simple virtuous cycle that productivity growth, prosperity and contentment flourishes and scarcity diminishes. The benefits do not solely accrue to those most motivated, the wealthy or those politically well-connected, but to everyone in society.

Most local grocers and butchers have been replaced by the likes of Costco and Amazon. The days of trading shares of individual companies has morphed into trading esoteric derivatives, ETFs, and a host of complex products. These intricacies are signs of innovation within maturing markets. The issue with which we must concern ourselves is the friction introduced to markets, not the market’s degree of complexity. When unnecessarily intrusive policies, laws, and regulations restrict our ability to be productive, incentives are diminished. Without proper incentives, productivity falters and the wealth and prosperity of a nation suffers.

As Milton Friedman said, “the record of history is absolutely crystal clear”.  A free market, capitalist system, despite all its imperfections, when properly protected by government as required by the founding documents, produces prosperity that benefits all of society.

A Quarter Of Snap IPO Buyers Agree Not To Sell For One Year

For the latest glimpse of the euphoria in the equity market, look no further than the Snap(chat) IPO, whose order book closes at noon today and is expected to price tomorrow, March 1, after the close. While the initial price range was presented as $14-16, according to Bloomberg orders for the public offering are concentrating in the $17-18 range, well above the high end of the range.

Yet while broad interest in the biggest IPO of the past few years is hardly surprising at a time when the S&P is trading at all time highs, what is more notable is that according to Reuters, Snap disclosed yesterday that it expected buyers of up to a quarter of the offered shares in the $3.2 billion initial public offering to agree not to sell them for a year. While Snap cautioned it had no binding commitments yet from investors accepting such a lock-up period, the disclosure is a sign of confidence from the company in what is expected to be the biggest U.S. IPO since Facebook.

In its updated IPO registration document with the U.S. Securities and Exchange Commission on Monday, Snap said it expected approximately 50 million shares of its Class A common stock purchased by investors in the offering to be subject to a separate one-year lock-up agreement. The roughly 50 million shares are designated for new Snap IPO investors who do not currently have a stake in the company, the sources said.

While lock-up periods help companies avoid stock volatility by preventing company insiders from selling within an allotted time, a year-long lock-up period for non-insiders is not only unusual, it is atypically long, potentially signifying strong demand for the IPO. Alternatively, since Snap is requesting it, the company may be worried about selling pressure out of the fate.

Lock-up periods can buoy companies at risk of a stock selloff in the months following their IPO. This risk is particularly strong for companies in the technology sector. Eight of the 10 biggest technology IPOs fell by between 25 percent and 71 percent in their first 12 months on the public market, according to a Reuters analysis of market performance.

Snap is targeting a valuation of between $19.5 billion and $22.3 billion from listing on the New York Stock Exchange on Thursday. While the company was initially looking to price 200 million shares on Wednesday night at a range of $14 to $16 dollars a share, the revised price talk may also lead to more shares being sold, effectively bumping up the valuation in the latest "hot", if money losing, social network.

Goldman Had 600 Cash Equity Traders In 2000; It Now Has 2

For the dramatic impact of technology, and specifically trade automation from algo, quant and robotic trading  on today"s capital markets, look no further than Goldman"s cash equities trading floor at the firm"s headquarters which, according to the MIT Tech Review, employed 600 traders its height back in 2000, buying and selling stocks for Goldman"s institutional client clients. Today there are just two equity traders left.

Complex trading algorithms, some with machine-learning capabilities, first replaced trades where the price of what’s being sold was easy to determine on the market, including the stocks traded by Goldman’s old 600.

Call it the rise of the machines which we warned about over 8 years ago back in 2009, just after the peak of the financial crisis, which have led to the extinction of the cash equity trader job.

"Automated trading programs have taken over the rest of the work, supported by 200 computer engineers. Marty Chavez, the company’s deputy chief financial officer and former chief information officer, explained all this to attendees at a symposium on computing’s impact on economic activity held by Harvard’s Institute for Applied Computational Science last month."

It"s not just cash trading: according to Goldman"s next CFO, Marty Chavez, areas of trading like currencies and even parts of business lines like investment banking are moving in the same automated direction that equities have already traveled. As Tech Review adds, today, nearly 45 percent of trading is done electronically, according to Coalition, a U.K. firm that tracks the industry. In addition to back-office clerical workers, on Wall Street machines are replacing a lot of highly paid people, too.

Ironically, the age of trading automation, means that the big banks, like the rest of the economy, are increasingly seeing the same income spreads that mirror the broader economy.

Average compensation for staff in sales, trading, and research at the 12 largest global investment banks, of which Goldman is one, is $500,000 in salary and bonus, according to Coalition. Seventy-five percent of Wall Street compensation goes to these highly paid “front end” employees, says Amrit Shahani, head of research at Coalition.

According to Goldman"s most recent quarterly report, after sliding for the past few years, average banker comp rebounded to the highest in one year, reaching $338,576, still well below the levels attained in recent years.

As the MIT publication adds, for the highly paid who remain, there is a growing income spread that mirrors the broader economy, says Babson College professor Tom Davenport. “The pay of the average managing director at Goldman will probably get even bigger, as there are fewer lower-level people to share the profits with,” he says.

With time, even more highly paid jobs will be lost to automation:

Complex trading algorithms, some with machine-learning capabilities, first replaced trades where the price of what’s being sold was easy to determine on the market, including the stocks traded by Goldman’s old 600.

Now areas of trading like currencies and futures, which are not traded on a stock exchange like the New York Stock Exchange but rather have prices that fluctuate, are coming in for more automation as well. To execute these trades, algorithms are being designed to emulate as closely as possible what a human trader would do, explains Coalition’s Shahani.

After equities, the next distressed group appear to be FX traders, which is hardly surprising after the recent scandals rocking the cash and spot trading FX community, resulting in billions of settlements payments over rigged fixes and markets. Here, Goldman has already begun to automate currency trading, and has found consistently that four traders can be replaced by one computer engineer, Chavez said at the Harvard conference.

Stunningly, some 9,000 people, about one-third of Goldman’s staff, are computer engineers, Chavez said at the symposium.

And, after equity and FX traders, it will be the backbone of Wall Street: investment bankers themselves: "Next, Chavez said, will be the automation of investment banking tasks, work that traditionally has been focused on human skills like salesmanship and building relationships. Though those “rainmakers” won’t be replaced entirely, Goldman has already mapped 146 distinct steps taken in any initial public offering of stock, and many are “begging to be automated,” he said."

Needless to say, this is great news for Goldman, which says that reducing the number of investment bankers would be a great cost savings for the firm. Investment bankers working on corporate mergers and acquisitions at large banks like Goldman make on average $700,000 a year, according to Coalition, with most MDs and partners earning orders of magnitude more.

Chavez himself is an example of the rising role of technology at Goldman Sachs. It’s his expertise in risk that makes him suited to the task of CFO, a role more typically held by accountants, Chavez told analysts on a recent Goldman Sachs earnings call. “Everything we do is underpinned by math and a lot of software,” he told the Harvard audience in January.

Finally, for the most glaring example of how technology impact new Goldman product lines, consider that Goldman’s new consumer lending platform, Marcus, aimed at consolidation of credit card balances, is entirely run by software, with no human intervention, according to the CFO. It was nurtured like a small startup within the firm and launched in just 12 months, he said. It’s a model Goldman is continuing, housing groups in “bubbles,” some on the now-empty trading spaces in Goldman’s New York headquarters:

“Those 600 traders, there is a lot of space where they used to sit,” he said.

Of course, regular readers are well aware of the extinction of the carbon-based trader, seen nowhere better than on the trading floor of the legendary UBS trading floor, once upon a time the world"s biggest.

Before:

 And 8 year after, when all that"s left of the UBS trading floor, and the legacy of that version of Wall Street, is this.

"Fake News" Facebook Lands On List Of "America's Most Hated Companies"

Facebook just can"t seem to catch a break lately.  From questionable privacy policies and mass data collection of its users to its handling of the so-called "Fake News" epidemic (see "George Soros Is Funding Facebook"s "Third-Party Fact Checking" Organization Targeting "Fake News""), Mark Zuckerberg is pissing off a lot of people these days.  Unfortunately, when your entire business model is based on "friending" others, the alienation of various groups has caused enough people to "dislike" Facebook that the company has landed itself on 24/7 Wall Street"s list of "America"s Most Hated Companies."

Coming in at #6, Facebook narrowly beat out Spirit Airlines, which, for anyone who has been left stranded by Spirit in Chicago"s O"Hare Airport in the middle of winter, that speaks volumes. 

1. Comcast (NASDAQ: CMCSA)


2. Bank of America (NYSE: BAC)


3. Mylan (NASDAQ: MYL)


4. McDonald’s (NYSE: MCD)


5. Wells Fargo Bank (NYSE: WFC)


6. Facebook (NASDAQ: FB)


7. Spirit (NASDAQ: SAVE)


8. DISH Network (NASDAQ: DISH)


9. Sears (NASDAQ: SHLD)


10. Sprint (NYSE: S)


11. Wal-Mart (NYSE: WMT)


12. Charter Communications (NASDAQ: CHTR)

Meanwhile, the two largest cable providers in the country also made the
list which is astonishing given their impeccable reputation for such
helpful customer service and 100% internet reliability.  But, only about 40% of
the households in the U.S. rely on those two companies for service so
it"s probably not a big deal.

But, of the top 12, Facebook was the only Silicon Valley giant to make the list despite, as 24/7 Wall Street points out, being a "boon for shareholders since it"s IPO."

Facebook has been a boon for shareholders since its IPO.
The company’s stock is now trading over 200% higher than its 2012 Wall
Street debut. However, not everyone is pleased with the social media
platform. In recent years, the company has drawn significant
criticism over its privacy policies and the mass data collection of its
users.

Recently, the company faced
sharp criticism for not doing enough to curb the spread of fake news
leading up to the U.S. presidential election. Since then, in an
apparent attempt to mend public relations, the company announced a
series of new policies aimed at identifying and flagging fake news
stories on its site.

 Oh well, at least they beat Sears.

Broad Market Gauge Still Hasn’t Broken Out... Yet

Via Dana Lyons" Tumblr,

One of the few indices yet to break out, the NYSE Composite is threatening its all-time highs.

One of the characteristics of the “Trump Rally” has been its breadth of participation. Sure, there have been a few sectors that have lagged badly. However, from a market cap standpoint, most indices, from micro-caps to mega-caps, have scored new all-time highs. It isn’t unanimous, though. A few broad market gauges have not quite made it to new high ground. The Value Line Geometric Composite is one that we mentioned last month. The NYSE Composite is another.

As the chart shows, the NYSE topped in May 2015 at the 11,240 level. After a tumultuous 19 months, the index finally returned to that level in December. And after a couple weeks of a pullback, it is back testing that level again, closing yesterday at 11,246.

A couple observations: First, we do not ever want to anticipate a breakout. That is, don’t buy something with the assumption that it will break out in case the resistance is too much to overcome. Think about the whole “Dow 20,000″ focus that seemed like an inevitability. Sure, it may still happen but the Dow has spent 4 weeks within inches of the level without yet attaining it. Rest assured that if a security or index does finally break out, there will be plenty of time and profits to reap should it indeed prove to be a successful breakout.

On the other hand, there is reason to be optimistic that the NYSE will indeed breakout. That optimism may partially be fueled by a potential cup-&-handle formation on the NYSE chart. As we’ve discussed on several occasions, this is considered to be a bullish pattern. What does it look like and why is it bullish? The pattern involves 2 parts, generally showing the following characteristics:

The Cup (May 2015-December 2016): This phase includes an initial high on the left side of a chart followed by a relatively long, often-rounded retrenchment before a return to the initial high.

The Handle (December 2016-January 2017): This phase involves a shorter, shallower dip in the security and subsequent recovery to the prior highs.

The bullish theory is predicated on the idea that after taking a long time for a stock to return to its initial high during the “cup” phase, the “handle” phase is much briefer and shallower. This theoretically indicates an increased eagerness on the part of investors to buy since they did not allow it to pull back nearly as long or as deep as occurred in the cup phase. Regardless of the theory, the chart pattern has often been effective in forecasting an eventual breakout and advance above the former highs.

Now, many technicians may take exception to the fact that the “handle” in this case is too short and too shallow in proportion to the cup. That is a reasonable protestation on technical grounds. However, the spirit behind the pattern’s typical bullishness remains valid, in our view, and it suggests an eventual breakout.

The post-election “Trump Rally” does not need any more confirmation for purposes of its “validation”. The emphatic new highs in many segments of the market, from small-caps to large-caps, speak for themselves. However, if the NYSE Composite is indeed able to break out to new all-time highs, it would be another feather in the cap for this market. And as with the Value Line Composite, it would certainly mean more than Dow 20,000.

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More from Dana Lyons, JLFMI and My401kPro.

NYSE Resumes Trading After 15 Minute Halt Following "Software Update"

Update: Here is what happened during the NYSE Trading suspension...

Following a 15 minute "technical issue" glitch, which forced the NYSE to halte trading from 10:50am to 11:05am, and which according to CNBC"s Bob Pisani was again the result of a "software update", the NYSE is back online and running, and according to an update post on its Alerts site, "all systems are now functioning normally."

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The last time the NYSE halted all trading, the market was surprised by just how little impact the half-day disruption had. Well, we are about to find out if that is again the case because moments ago the NYSE reported that "NYSE Arca has identified a technical issue that will require a temporary suspension of trading at 10:50 ET.  Trading is expected to resume at 11:05 ET. All orders on NYSE Arca will be cancelled."

NYSE advises customers with questions to contact the NYSE Trading Operations Desk at 1-212-896-2830.