Do We Have A Unit of Account Problem?
Last week was a record breaker, not for any certain commodity, but rather one specific market and that was the market for fine art. Leonardo da Vinci’s painting “Salvator Mundi” sold at at Sotheby’s auction for a record breaking $450 million. Russian billionaire Dmitry Rybolovlev, bought the painting in 2015 for $127 million, not a bad investment! Many are impressed by such an exorbitant amount, we aren’t however. We understand that value is not in the eye of the beholder in this case, but rather the value is in the conversion out of fiat currency and into a tangible asset. You see before we could truly understand value, we would have to first toss out everything we have learned from those static academic theoretic models, then and only then would we be able to see the light. Da Vinci gave us that light in the many prophetic verses that he once wrote, one of which goes like this, “There are three classes of people: those who see, Those who see when they are shown and finally, those who do not see.”
That quote certainly hits the nail on the head doesn’t it? As our many readers know, we always opt for the Occam’s Razor principle and that is the simplest explanation is usually the most essential explanation and it’s in quotes like that, one can easily extrapolate mankind’s overall critical thinking ability. Ok maybe not all of their abilities, but certainly copious amounts. We find ourselves digging week in and week out, expounding upon our unique abilities to question and then try to subsequently answer those things we know that will affect your lives in one form or another.
Last week our letter touched upon the growing effectiveness and learning capabilities by Artificial Intelligence. AI seems to continue their long only ways in the global equity markets. We talked about the AI’s ability to conceptualize, to adapt and to become increasingly skeptical of the mere fact that equity markets, perhaps may never move lower. Yes we mere mortals have learned a thing or two from our own historical fortunes and misfortunes, but AI, hmm, no it’s different, or shall we say, indifferent!
It knows nothing of emotion, or anything remotely resembling such archaic trait, rather it learns and its resolute and it implements based upon its massive ability to collect and simulate forward millions upon millions bits of data at lightning speed. So it was our thesis, our presumption, that maybe just maybe, AI and its HFT wielding programmatic execution arm is a self-serving positive feedback looping construct. A construct who’s data has told it that equity markets rarely if ever fall, so why plan for it?
We can hear the AI now, laughing its arrogant digital laugh, a binary euphoria to themselves while sucking energy and immersing themselves in a steady flow of AC Air emanating from its cooling fans, “these dumb humans, don’t they know that markets rise at a 7.5% a year rate and that all we need to do is keep that relative value in a nice linear fashion and mission accomplished?” Anyway, that was our thought and we hope you received it well, for we believe nothing really else matters, well except for the central banks and all their free money they toss around to their well-connected first to the spigot 0.1%ers.
We know the central banks can’t stop now and that the game of QE hot potato is still in Asia and Europe and slowly here stateside, the FED is desperately trying to display some sense of sanity for its constant Keynesian solutions set.
Yes we know they will raise rates next month.
Yes we know at the Fed the academic is out and the lawyer is in.
Yes we know short rates are rising.
However, we also know that means the banks are going to get an extra $7 Billion a year for doing zip, nadda, zilch, nothing and that the net slush fund total will be around $33 Billion come end of next month. So what are we missing? Giving out that kind of money per year, for free doesn’t seem like a tightening to us now does it! Ok yea LIBOR is rising and yea the 2s10s curve continues to get pancaked, but that’s expected. Banks not only get the free money, but they will raise rates on its customers and capture an even greater spread. Hell, just the other day we heard some dealerships are trying to charge 19%, 19% can you imagine the thievery, on 6 year loans none the less, the audacity of these people, where’s their dignity?
We don’t agree with it, we never did, but then again, we aren’t fools either and Citigroup’s Chuck Prince said it best back in July of 2007, “As long as the music is playing, you’ve got to get up and dance, were still dancing.”
Yes Chucky you are still dancing, but fortunately for you the central banks kept us all from dancing on Citigroup’s grave back in 2008, for the rest of us mere mortals, we ain’t that lucky. As one of our favorite comedian, George Carlin put it so eloquently, “it’s one big f&$king club and you aren’t in it!”
So with all that in mind and considering the speed in which information is digested and tossed aside, we can’t help but think the path of least resistance still remains, higher equity prices, higher short term rates and higher prices for tangible assets. It’s not all daisies and rose petals however, oh no, we aren’t naïve. We don’t envy corporate treasurers that have sold their shareholders down the river of debt. We know too well the scheme of only affording interest payments and we know full well your revenue better cover those payments, because the window shuts very quickly when the cold stale air of higher funding rates comes a blowin. So when that façade starts to crumble, then perhaps we will change our narrative. We have always said, the real turning point will come from the bond markets, especially Fed Funds and LIBOR. Trillions upon trillions of debt, shadow debt, swaps rely upon cheap funding and when that curve inverts, well than nature will begin to weigh in. The weight of all that debt, the density of which will be like a 500 trillion ton rock falling so fast nobody will be safe, but hey there’s always the BOJ, ECB and SNB to swoop in and provide adequate debased funding.
Speaking of the SNB we read an interesting piece on the $810 Bln central bank behemoth, SWF, hedge fund, black hole, whatever you want to call it. What a great gig, charge 75bp to your customers and go out and buy global debt and equities. They own some $90 billion in equities worldwide, but then again, in a rising tide all boats are lifted right. This brings us back to the good old topic of valuation. This also brings us to a new segment we will call CryptoCorner. Our intent is to cover any relevant topics in the Blockchain and Crypto currency space. Obviously valuation is a key component to pricing something successfully, it may even determine if something is over or under priced, or in a so called “bubble.” We have spoken many times in the past that the term, “bubble” is so passé. We can’t really have a bubble when we have insane central bankers around the globe QEing to infinity now can we? NO, so let’s stop that nonsense, let’s just say, we have a unit of account problem and that problem is anything fiat! No wonder UBS and GS are so bullish, what’s not to like!
{CryptoCorner}
v Bitcoin had a bit of roller coaster ride last week trading sub $6k with the cancellation of the Segwit2x fork but currently back above $8k
v Bitcoin Cash also saw a rise up to $2300 after the cancelled fork but currently trades back at $1200
v According to our proprietary data set the largest Bitcoin wallet sold 24743 BTC last week to drop their wallet holdings to 163718 BTC with a current valuation over $1.3 Billion -all this selling and the market continued higher
v The number of wallets holding at least 1 BTC rose 3148 on the week to 595566 addresses or 95% of all outstanding
v The number of wallets holding at least 10 BTC rose by 186 addresses
v The number of wallets holding at least 100 BTC rose by 76 addresses
v Total Bitcoins outstanding 16,682,908
v CME Group plans a December launch for Bitcoin futures but no concrete date is set
v Rumors circulating of Bitfinex and Tether are manipulating the price of Bitcoin (Article Link) –to us real traders, we know this is a very real possibility
v Tether wallet hacked by same hacked Bitstamp culprit from 2015 as some sleuth posted his detective work on some websites earlier this week
v We aren’t advocating Tether as it’s a security risk via an extra counterparty to the layer of the block chain, but as always research
v Wealth Managers seeing overwhelming demand for info on Bitcoin (Article Link)
v Marcus Treacher, Head of Strategic Accounts at Ripple had a nice presentation called “The Future is Here, Blockchain and Digital Assets Drive Change” if you can find it on the internet, well worth a listen, you can get it at BrightTALK but you have to sign up
As we have stated many times before, this new Blockchain technology, Bitcoin, Crypto in general will have some bad actors, will have a vetting process, and adherence and adoption will take time. We strongly advocate you find out more, before you dive in.
Ok that is it for this week. We hope you enjoy your Thanksgiving Day holiday; we have many things to be thankful for. Thankful for all of those that have fought and continue to fight for our rights, our safety and the very liberties in which we are enabled with via their dedication. Thankful for all of those around us who help us, who put up with our crap and still somehow stick around, Thank you to all of you who continue this journey with us, hopefully we are adding value to your investing needs and we hope you continue onward with us. We can’t help but look forward to the table side conversations, seeing some old faces we haven’t seen, maybe some new ones as well. We are always humbled by father time as he marks our passing in unique and memorable ways, somehow time does indeed continue to fly, as this year has truly gone by quick. No doubt we will get questions upon politics, markets, and of course bitcoin, which we can’t wait to see all the nonsensical opinions flying by. We intend to stuff ourselves with fanciful delights and hopefully a cocktail or two, or three which we will no doubt regret the next day!
We leave you with the weekly settles but before that, 2 charts from Dave at Keystone Charts Inc. If you haven’t asked for a trial, you should, you are losing out on some great daily work and insight.
The first chart is Crude which looks like it wants to test the 200 wma, but needs a catalyst:
The next chart shows the continued destruction in the yield curve, notably the 2s10 here:
Finally the Weekly Settles as you can see the Nasdaq is still the star performer in the traditional space, Bitcoin in clear defiance of the laws of gravity (we prefer density) and the Emini SP500 still holding in as we stick with our 2640 yearend target. Cheers!
