Deutsche Bank cuts staff, Systemic Risk and Bitcoin Grow

Thanks everyone for joining us for this week’s Econemotion brought to you by Mike Agne of Magnelibra Capital Advisors. You can find our blog page at www.econemotions.comwhere we write our weekly thoughts in hopes that we can provide you with unique insights upon markets, trading and risk.

I am the manager of Magnelibra Capital Advisors which is an NFA registered CTA, that manages individual accounts and executes the Blue Dragon Discretionary Program, a long/short relative value futures and options trading program. Feel free to visit our website at www.magnelibra.com and follow me on Linkedin as well.

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Morgan Stanley’s cross asset allocation team head Andrew Sheets, a division which includes the economics fundamentalist Michael Wilson, put out this week that it is cutting its stock allocation to the lowest on record. MS sighted 3 specific reasons:
Valuations/expected return: Higher prices now mean our expected 12-month returns for global equities are near their lowest levels in six years. That result is similar based on bottom-up Morgan Stanley forecasts or top-down approaches.
Fundamental: Those valuations face additional pressure as we think consensus earnings in the US, Europe, Japan and emerging markets remain too high. Meanwhile, continued weakness in global PMIs and commodity prices suggests that the economic risks are real.
Technical: While positioning isn't heavy and sentiment is far from 'euphoric', we see worrying signs in other 'technical' factors including market leadership and seasonality. Meanwhile, crowding does look significant within sector and style

They posted an excellent graphic which we have here and where we highlight with red arrows the cross roads point, are we there yet?

So, in order to counter this argument just a bit Yardeni Research put this juicy chart out there for us last week. As always Yardeni Research does an excellent job of supplying the ammo for what is truly going on. For all the fundamentalists who keep saying equities must fall, we are going into a recession, well, when you have a -$700Bn net issuance...prices can't and will not fall! As we have also written about many times before, corporations are buying back huge amounts of their own shares and this puts a very large bid under the market.

We have massive headwinds in terms of overall debt amounts out there, geopolitical posturing, domestic tax increases, global discontent, mismatching economic fundamentals and thus there is easily a multitude of things that could overwhelm these corporate buybacks and even diminish the potency of central banking negative rates. One of these things is systemic risk and this weekend Deutsche Bank announced it will be laying off 18k employees or 20% of its workforce. Remember, we posted DB’s derivative risk a few weeks ago, remember this pic:

This is the type of thing that can send a wave of systemic shock through out the system. We remember LTCM in 1998 and this is factors larger and no its not relative to the size of the system. Central banks are already stretched and will have to increase balance sheets further and go deeper into negative interest rate territory to continue to combat these zombies. We keep hearing that their derivatives book isn’t this big, that netting eliminates a lot of risk, oh really pray tell explain this from their 2018 annual report:

So, to all you novices that haven’t been around very long and are simply used to writing binary black box code structures, mean reversion and momentum can be very unforgiving and the exits close fast. Its been a decade since we have seen real risk and just like the largest quack to hit California in decades…perhaps this is all just a warning shot!

With all this in mind, let’s look at some technical market charts. First up we have the Nasdaq the 7900 level is still holding strong and as you know we still like 7767 as our bull bear pivot, but this resistance band has piqued our interest:

Next up Gold, which has fallen back some as fear that the FED may not pull the big trigger at the end of the month, thus some risk off there seems to have occurred and putting us back down below the $1400 level:

Lastly, we have Crude Oil where $60 is proving formidable resistance and has been rejected so far and we will need a cross above there to convince us that new highs may be in the offing:

Moving to Bitcoin, we can see that the 61.8% at $13.6k led to a firm pull back, but Bitcoin is showing its resiliency once again by over taking $12k. We tend to feel that if $13.6k is broken again, a sharp move toward NATH’s may come quick. (New all-time highs)

The SEC and FINRA continue to try and lay out a framework for crypto assets and this week, they announced a joint statement, ““Put simply, the Customer Protection Rule requires broker-dealers to safeguard customer assets and to keep customer assets separate from the firm’s assets, thus increasing the likelihood that customers’ securities and cash can be returned to them in the event of the broker-dealer’s failure.” There is a joint meeting in Chicago this month to discuss broker-dealer custody of crypto assets, so hopefully we can get clarification. All we know is, this framework will continue to advance and this will solidify our belief that these things are here to stay. For those that still think these things are just novelty, we are here to tell you, you are dead wrong. In fact, Bitcoin continues to exhibit exactly what it was intended for, that is Systemic Stability. What do we mean? We mean that the Bitcoin network is one of the most secure networks the world has ever seen Hash power hit a high mark of 66.7 quintillion hashes per second, unprecedented to say the least and security of the network continues to grow unabated. Saifedean Ammous, who we think of as an authority on Bitcoin, said in his book The Bitcoin Standard, “Difficulty adjustment is the most reliable technology for making hard money and limiting the stock-to-flow ratio from rising, and it makes Bitcoin fundamentally different from every other money.” The larger the ecosystem grows, the more secure it becomes, as we have said time and time again, Bitcoin offers the intrinsic value of security and decentralized P2P, what does fiat money offer? Debt, plain and simple, debt and devaluation.

Staying the course in Crypto Vitalik Buterin weighed in this week on Facebook’s Libra in a tweet saying, “a *corporation* has successfully taken action to restrict the actions of a *government* citing public interest grounds. Normally the arrow points in the other direction. But I predict in the next few decades we'll see more cases like this.” Well let’s get one other thing straight, Libra is not decentralized and its basket of crypto are not static. We can agree with him that giving a corporation this much power will be met with strict regulatory interference. Then again, we all know what went down the same day Facebook went live. DARPA’s Lifelog was taken down on Feb. 4th 2004 you guys think this is coincidence? Read more here

Ok that is it for this week, we hope you got something out of this writing, we hope we insight you to dig further, to refine your craft, to be proactive in the quest for continuing knowledge and education as we are all in this together. Thanks for reading, cheers!

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