2017 Review, 2018 Whats to come & {CryptoCorner}
What a year and we can safely title 2017 as the year of the Trumpster and the year that everyone finally realized that the only thing that matters to the markets is how much the central banks collectively, willingly and so readily financed global asset markets. We can remember a year ago and all the collective worry as to the president elect and what he would be willing to accomplish and how much uncertainty a wild card like Trump presented. There was worry that he wouldn’t be able to accomplish anything that the FED would raise rates and stall growth and volatility would hasten vast amounts of uncertainty. Well as 2017 proved, even the most resilient established players were not immune to the president’s wrath. He wielded a most unpredictable demeanor and one in which frankly, scared the hell out of most conservative advocates of the Republican and Democratic Party alike. We thought that his unpredictability, his adolescent behavior at times, his condescending boorish manners were the exact thing his populist supporters wanted and he certainly delivered. Now we don’t want to get political but we have to say the markets certainly enjoyed his first year in office as the equity markets all grew in the US at over 20% and even 30% in the NASDAQ. But hey is that all that matters? Well to the top 10% that own equities, yes that’s all that matters and it is what the FED seems to only care about as well. Hey we don’t want to just pick on the FED as it’s a coordinated global effort and it will continue into 2018 and well beyond. Yea yea, we know the the FED is going to raise rates and they should. We know they are going to cut the balance sheet, but that is well publicized and well overshadowed by the amount of QE that continues unabated by the other Central Banks around the globe. We don’t want the reader to think that the FED doesn’t have the power it once did, but hey it really doesn’t. As we have pointed out time and time again this year in our weekly missives that rate hikes are not rate hikes, but rather they are a subsidy to the banking system to the tune of nearly $34Bn dollars a year. So the FED continues QE even though on the forefront it is raising rates, it’s really a stealth subsidy.
So what does that mean for the markets come 2018?
Will the FED’s rate hikes thwart this continued linear equity and debt boom? We don’t think so, we feel that the US equity markets can continue its ascent into double digit percentages once again pushing the SP500 toward the 3000 level and the NASDAQ finally breaking that 7000 barrier. Yea we know it sounds crazy, yea we know it defies all sense of fundamentals and it drives the James Grants, David Stockman’s of the world crazy, but hey that’s the reality as we perceive it and we can justify it by the following central bank numbers:
The Peoples Bank of China’s (PBOC) 2017 total all system financing aggregates grew by an annualized 2.76 Tn RMB or $424 Billion Dollars(they call it financing instead of QE utilizing SLF and MLF financing acronyms)
The European Central Bank (ECB) 2018 QE will continue at a pace of 30Bn Euro a month or $433 Billion Dollars for FY2018
The Bank of Japan (BOJ) is adding around $450 Billion Dollars a year
The Swiss National Bank (SNB) balance sheet increased by $100 Billion Dollars in 2017 and no need to expect it not to continue its private asset purchases
(Sources: pbc.gov.cn / Bank of Japan / data.snb.ch / ecb.europa.eu)
So all in all you can see why the Federal Reserve and its rate hikes and balance sheet reductions when combined with the entire global central bank complex is merely a blip on the radar compared to continued global asset accumulation and overall balance sheet increases. Collectively the other global central banks at a minimum are going to support the markets with nearly $1.4 Trillion Dollars in 2018. This is why we feel the markets continue unabated. Now we feel the FED is hell bent on getting short term funding above the 10yr rate and as we have stated in many letters, this is our true line in the sand. We feel that the leverage will begin to be removed as we near that all important threshold. As you will see in the charts later on, the US yield curves have flattened massively this year and rightfully so, but this move becomes less pronounced as we compress and it will put the FED in a continued precarious position. We feel they are merely raising rates just so they can cut massively when all this leverage is finally purged and trust us, it always happens and this time will not be any different. From the words of the immortalized 2-Pac “that’s just the way it is.” (We like the original by Bruce Hornsby, but 2-Pac brings a bit of street cred to the lyrics) Just to point out what we mean, read and sing these opening lyrics from the original and see if you get our point:
Standin' in line marking timeWaiting for the welfare dime'Cause they can't buy a jobThe man in the silk suit hurries byAs he catches the poor old lady's eyesJust for fun he says, 'Get a job'
That's just the way it isSome things'll never changeThat's just the way it isAh, but don't you believe them (That’s Just the Way It Is –Bruce Hornsby 1990)
We find music emanates the signs of the times and sometimes like fashion the sights, the sounds the smells of times past give us a glimpse of the current state of our affairs. We can’t tell you why we feel things, why we view things the way we do, we can only convey our thoughts in order to cognitively spur your own emotions and see things from your own perspective. Anyway let’s press on and in order to see where we are going, let’s first see where we have been.The NASDAQ was the star traditional equity index on the year as it powered to a 31.4% gain while the often underpinned underdog the DOW posted a nice 26.4% gain. The Nikkei also climbed to a very respectable gain of 21.4%, mostly central bank driven and by no means a product of all the Crypto money being made over there, although there is plenty of speculation that the crypto gains have indeed caused GDP to rise over there. As it should as real people are making real gains and all to the chagrin of central bankers alike.
Crude Oil was a tale of two very different halves of the year. What is kind of interesting is that it spent the first half of the year losing nearly 24% and then begrudgingly climbed its way all the way back to end the year up some 3.4%. Crude has some decent momentum going into 2018 and it’s not shocking to say the least with what’s going on in Saudi Arabia and the Middle East in general, not to mention the petro dollar arrangement. Anyway in the WTI contract, we know $60 is key and if a consistent close above occurs, we could see a substantial rise in the complex, here are the charts:
Gold powered into the final month of the year regaining all of the lost ground from November to end the year above the $1300 mark with a nice 11.5% gain on the year
The US 30YR Treasury Bond posted a decent 8.6% return via capital gains and an interest rate of 2.75%. The shorter end of the curve didn’t fare so well as the 5yr US Treasury note rose around 29 basis points to 2.21% nearly a 35% increase in yield from its low weekly close of 1.64% in 2017. We will go over the charts and you will see just how massive the compression in yield curves was. Speaking of yield compression, look at this BAML IG chart from Charlie Bilello at Pension Partners:
It’s no wonder the US curve is so flat, we feel the extension of investment into risk assets is not being accurately accounted for in terms of overall risk. Compensation yield or term premia is so tightly compressed that it is almost priced for perfection and we all know in the real world this is simply just not possible. Anyhow this is a great chart and is very telling.
As for the US Yield curve charts, here they are and in many thanks to Keystone Charts, the first chart is the weekly 2s30 with major support around 68 basis points:
This next one is the 5s30 right at important fib support at 56 basis points:
Here is the 2s10 an important proxy for most yield curve watchers nearing major 47 basis point support:
As you can see the compression in yield spreads in 2017 on the heels of the FED tightening has created a situation where debt is becoming more expensive at a time when central banks are cutting the QE nearly in half for 2018. Now there is still plenty of accommodation but as time moves forward, GDP growth requires constant QE and any reduction in said mechanism will eventually lead to a restriction in growth. Maybe the central banks realize that this unstable path is becoming exactly that, unsustainable and as we have said in the past, we hardly envy their position. So now that we know that they truly have no idea what they are doing and as this massive tide of QE has lifted all asset boats, what happens when the spigot is finally shut? This is why we believe they can never truly cut it off completely; the system has become entirely dependent upon it. They know it and we know it. So with the ECB moving to $30 Bn or so a month, we can only figure the Bund will be under some pressure in the coming months, which may spill into all the other global bond markets. However the caveat remains, will Bund selling lead to US bond buying? Maybe and thus the juxtaposition of these two markets will be interesting to watch this year. Anyway the Bund is faltering a bit here to start the year:
So with the ECB cutting QE in half and virtually all peripheral spreads as tight as ever, we feel there is major risk for some exogenous event causing these spreads to blow out. Catalonia and Spain, Brexit, North Korea…you name it there are a lot of uncertainties…not to mention Blockchain and Bitcoin and the Crypto currencies that are now just only coming main stream. We don’t really know the true effects upon fiat currency valued assets, but as we enter 2018, it’s safe to say, we are going to find out. This leads us to our weekly section:
{CryptoCorner}
Let’s just get to some quick bullet points before we discuss anything Crypto related shall we:
With Bitcoin trading $14,700 its up over $3,430 and +31% m/m (month over month)
Over 9.5 million Bitcoin addresses created in the month of December 2017 alone
2nd largest Bitcoin address added 60000 BTC in final week of 2017, bringing the total BTC owned to 179203 (Big money adding on down move) and moved into the top spot
Last weeks largest Bitcoin address shed 5298 BTC on the week moving total owned to 142150
At a $14,700 BTC price both address worth over $2.6 Bn and $2.0 Bn respectively as shown here:
Weak hands sold out of their BTC in the final week as the number of addresses with at least 1 BTC dropped by 14782 addresses (Weak hands selling out)
With Ethereum trading $860 its up nearly $400 and 85% m/m
With Litecoin trading $253 its up over $150 and 150% m/m
Ripple (XRP) the crypto we spoke of weeks ago as the banks play exploded in December which started the month near $0.24 now trades $2.18 an 8x m/m gain
CBOE files to list 6 bitcoin ETFs after being first major exchange to trade cryptocurrency futures details can be found Here
OK, let’s get to brass tacks shall we…as far as 2018 goes, expect to hear from a lot of newbies claiming to be experts, when there’s blood in the water there will be sharks and rest assure, they’ll be coming out claiming to be experts…So be leery and rest assure we have steered you and have always tried to steer you in the most simplistic ways when it comes to complicated investment subject matter. We have tried to keep our dear readers at the top of the “know” list and our readers have been hearing about blockchain and Bitcoin for quite some time now. We will continue to do our best in relaying the most pertinent, the most accurate data we can and to then try to decipher, decode if you will the seemingly exhaustive properties that this new asset class seems to exhibit. We will never claim to be an expert as we like to think of ourselves as avid admirers of education and research and with that we can only claim awareness and understanding from our own perspective as we encourage our readership to do their own selective research as they see fit. So what can we see from the Crypto space moving forward onto 2018?
We will continue to see advancements, adoption, absorption and most certainly an entanglement of regulations from global governing bodies
Technology and Innovation will continue to gain and defy expectation as Moores Law continues to define huge advancements in computational power
Expect continued increase in volatility in the Crypto space as the winners and losers become clear and new exciting startups begin to emerge
Expect the lightning network to continue to advance and gain traction as the continued buildout of the blockchain ecosystem begins to unfold
With all of this we should point out that the true nature of Bitcoin in its original form, most likely did not want its users, using an “exchange” to transact Bitcoin via an intermediary. For most that don’t know or haven’t been around since the beginning, localbitcoins.net (.com) was and still is the place to interact, buy and sell Bitcoin face to face. It offers the greatest anonymity, but also the greatest risk. Now we wouldn’t advocate this method to our readers, but rather we just wanted you to know that this true physical market actually exists. We ourselves have been privy to this since the beginning and we aren’t sure which will survive in the long run, the exchanges or the physical interaction. So for those readers utilizing the exchanges, we highly and we mean highly recommend cold storing your Bitcoin or crypto but be very mindful of the diligence needed in succeeding at such a task. By cold storage we mean buying a hard wallet such as that offered by Trezor, Ledger, KeepKey…They are specific to certain crypto currencies so DO YOUR HOMEWORK. Once you store your crypto offline it is entirely up to you to safeguard all access, secure all passwords and take full responsibility.Finally we just want to add that buying Bitcoin is buying into the technology that it’s based off, that is Blockchain. However Bitcoin is not the only crypto in the space and the technology is so new that the winners may not even be in existence yet, so with that we require you to research, learn and dig into any crypto you may be interested in putting risk capital into. It seems as if early adopters, including the miners are using Bitcoin as a hedge against central banks QE and fiat currency destruction. Most don’t realize that fiat currencies like the US dollar are nothing more than instruments of debt, designed to lose value over time via inflation. Bitcoin is almost the exact opposite, it has a hard ceiling in terms of supply and its supply is governed by laws of mathematics. We see it as a pure supply demand play with unknown future potential that is why the price is in its true discovery stage. Many say it’s worthless and offers no value, others will claim it could go to $1 million or more, we feel the true value is unknown but at this point, it’s merely in its infancy and nobody truly knows the real value yet. We however are very excited as to the future potential and realize that in a digital age this type of instrument makes perfect sense. What current naysayers fail to understand is that, fiat currencies existence in a digital age is waning and something will eventually replace it. Whether it’s a decentralized blockchain protocol or some other form of centralized layout structure is yet to be determined. We do however fully understand the vision of a decentralized immutable ledger such as Bitcoin and we feel that the future of mankind would be very wise to adopt such an open source protocol. What investors and main stream individuals need to ask themselves is whether or not the future of economic systems lies within the control of a DECENTRALIZED system or a CENTRALIZED one. We know which one we prefer and we understand the original vision laid out by the Satoshi Nakamoto consortium, that is a system that merely functions to the benefit of the very few at the expense of the many is no system at all.We truly, honestly and down into our deepest thoughts, know that this technology is a real game changer. We have constantly pounded the pages with the fact that disruptions to industries is often met with angst and rebellion, but we know that this is just the tip of the iceberg and that the future is certainly bright, with all the potential applications that will arise out of further blockchain adoption. Our readers have been exposed to this space for quite some time and we would be remised if we didn’t pat ourselves on the back just a little bit. As you know we take great pride in the way we communicate, the way we look at the world and the way we can breakdown the very subjects that we think matter the most to our readers. The world is full of data, anyone can retrieve it, but the real value is what you do with that data, how you shape it, how you convey it and whether or not it is clear and understood by those you are deciphering and disseminating it to. You could be reading many things and the fact that we put so much effort into what we present, should give you, the reader some solace and faith that we strive endlessly to present nothing but the best. Our letter is the type of qualitatively driven research that requires the utmost attention to detail and focus. We strive to offer an alternative and unrivaled approach to markets, an approach that is designed to inspire, invoke and tantalize your senses to improve your own cognitive wellbeing. We don’t want to be your only source, but rather a constant in your life so that we can all collaborate together. This year we spoke of the adoption of Artificial Intelligence and the IOT or Internet of Things. We don’t want you to be afraid of these things, but rather embrace them to ease your way of life, allow you the freedom and flexibility to become a better human being and enjoy some of the things in life that in past times may not have been possible till now. We never know how long we have on this earth so it is up to all of us to create lasting impressions upon others in the most positive way we can. What we ask of you this year is to find things that inspire you, that challenge you and confront them. It’s not easy, but the best things in life seem to require just a bit more courage, something we can define ourselves that truly makes us unique. We are inspired each week to figure out a way to make you the reader more informed and then to uniquely present it. We put all our effort into this and we hope it shows. As we begin 2018 we hope that your journey this year takes you to heights you have never reached, to sights you have never seen and most of all brings you peace that you have never found before. We ask that you put your heart into all that you do, that you hold onto all the things you love as if today was your last day, because one day, it will be. To further emphasize what we mean, feel free to view this link Here it’s the final scene of Meet Joe Black where Bill Parrish played by Anthony Hopkins is finally at peace with his fate and says to the merchant of death or Joe Black played by Brad Pitt, “It’s hard to let go isn’t it? Yes it is Bill, Well that’s life what can I tell yah.” Then Bill asks, “Should I be afraid?” Joe Black responds in a confident yet soft voice, “A man like you?” When it’s all said and done, when you look back on everything, remember we only have one life to live, so live it!
Cheers and we leave you as we always do, with our final weekly settle of 2017 and we are excited to announce the addition of Ripple (XRP) to our monthly watch list:
